Loonie jumps to highest point since 2015 as traders bet rate hike is coming next week

The Canadian dollar briefly touches the 81-cent US level, its highest point since the summer of 2015, as currency traders take a slew of economic data as a sign that the Bank of Canada is preparing to hike its benchmark interest rate again, as early as next week.

Traders were expecting 1 more rate hike at some point, but few thought it would come so soon

The Canadian dollar briefly broke 81 cents US on Friday, its highest level since the summer of 2015, as currency traders took a slew of economic data as a sign that the Bank of Canada is preparing to hike its benchmark interest rate again, as early as next week.

The loonie rose as high as 81.02 cents US early in the day, after a report showed the American economy created fewer jobs than expected last month. The report came on the heels of a separate Canadian GDP report Thursday that showed Canada's economy is growing at an annual rate twice as fast as the U.S. rate.

The Canadian dollar later traded at 80.67 cents US, up 0.56 of a US cent on the day.

Friday's jobs report was taken as a sign the U.S. central bank will be in no hurry to raise its benchmark interest rate. But Thursday's Canadian report on Canada's economy suggests the Bank of Canada is preparing to move in the opposite direction and make lending more expensive.

"We believe the central bank remains on the path toward raising its policy rate by about one full percentage point by the end of next year," Scotiabank predicted on Thursday, "and likely more increases than [are currently] priced in by markets through 2018."

Soft job numbers added to pressure on the U.S. dollar generally, the bank's chief foreign exchange strategist Shaun Osborne said in an interview.

"The market is less convinced that the Federal Reserve can raise rates again in the near future," he said. Monetary policy in the two countries is diverging, Osborne said "and rate differentials have been moving in the Canadian dollar's favour."

Rate hikes tend to move a country's currency higher, as it makes investing in that country more worth the risk — which explains why currency traders are turning their U.S. dollars into loonies to ride the wave of Canada's comparatively booming economy.

Experts have been predicting another rate hike at some point this year after the Bank of Canada moved higher for the first time in seven years earlier this summer, but most didn't expect it to be until the fall or even later.

Even money that a hike is coming

As recently as Monday, the odds of a September hike were just under 1 in 4. As of Friday, however, the likelihood was up to 56 per cent — roughly doubling in a few days.

Indeed, the sudden rush toward the loonie could actually give the central bank pause next week, for fear of sending it any artificially higher.

"The Bank of Canada may also wish to prevent stoking the fires on a strong Canadian dollar by appearing rushed," said economist Frances Donald at Manulife.

While a second rate hike was expected at some point soon, the danger of one next week could be that people would interpret the central bank moving early as a sign it's going to move more, Osborne said.

A rate hike next week would push the loonie up even higher "and I'm not sure the Bank of Canada wants to see that happen too quickly," Osborne said. "Whether we can get to 85 cents or ever close is a bit of a stretch at this point."

With files from Meegan Read

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