The long awaited BOC hike finally came today with Governor Dodge raising the overnight lending rate to 4.5 percent. Traders have been pricing in the rate increase for weeks and after the rate hike came, the USD made a violent pullback against the Canadian dollar, harvesting almost 70 pips.
For the first time in over a year, the Bank of Canada hiked rates by 25 basis points. The interest rate hike was widely expected as recent Canadian economic data signaled growing inflation.
Canadian house starts fell by 4.2% in June which translates into 225,000 units. The housing starts figure was slightly higher than analysts? predictions of 216,500 units.
[I]Source: Financial Times[/I]
Post rate decision rhetoric from Governor Dodge indicated an additional rate hike may be necessary to control inflation. Dodge commented, "some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term."
[B]Currency Markets: USD/CAD
[/B]The long awaited BOC hike finally came today with Governor Dodge raising the overnight lending rate to 4.5 percent. Traders have been pricing in the rate increase for weeks and after the rate hike came, the USD made a violent pullback against the Canadian dollar, harvesting almost 70 pips. USDCAD remains volatile in the early Tuesday morning hours, but price action is expected to cool off later-on today. The USDCAD was most recently quoted at 1.0537.
[B]Equity Markets: S&P/TSX Index[/B]
The S&P/TSX opened lower today as Bank of Canada raised interest rates, which could have potentially negative implication for Canadian businesses. Quantum Minerals Ltd. dropped $3.26 along other raw material exporters on a Home Depot announcement that stated their earnings will drop by 15 percent. As metal prices dropped, recent excitement over Alcoa?s $27.7 billion bid for Alcan cooled, driving metal producers lower. The S&P/TSX was most recently quoted down 3.53 points at 14,173.99.
[B]Fixed Income: Canadian Government 10-Year Bond
[/B]Despite today?s rate hike, yields fell as Canadian bond prices rallied. Post decision rhetoric indicated that there will be a substantial amount of time that will lapse before the Bank of Canada raises rates again. However, banker?s acceptance rates are still pricing in two additional rate hikes one year out. The Canadian 10 yr was most recently quoted at 95.610, yielding 4.6 percent.