Photographer: Pawel Dwulit/Bloomberg

Loonie Surges to Two-Year High as Bank of Canada Hikes Rates

  • Currency jumps as much as 1.8 percent as bond yields rise
  • Further rate moves to be guided by incoming data, BoC says

The Canadian dollar jumped to a fresh two-year high and bond yields surged after the Bank of Canada increased borrowing costs for the second time in three months to remove stimulus from the fastest-growing Group-of-Seven economy.

The currency soared as much as 1.8 percent to C$1.2146 per U.S. dollar on Wednesday as the central bank increased its key rate by 25 basis points to 1 percent. The loonie traded at 81.76 U.S. cents. Yields on Canadian government bonds rose across all maturities, with the rate on the two-year note jumping eight basis points to a five-year high of 1.43 percent.

Canada’s currency and short-term yields surged in the run-up to the decision after surprisingly strong second-quarter growth data last week, which bolstered the view the central bank could lift rates for the second time this year. Most economists were betting on an October increase.

“When you have an economy growing steadily and outpacing the rest of the G-10, there’s always a higher risk that this type of events will occur,” Angus Sippe, a New York-based multi-asset portfolio manager at Schroders, said by phone. “The Bank of Canada will continue to be opportunistic and if the market allows them to hike, they will.”

Canada’s gross domestic product expanded at an annualized rate of 4.5 percent in the second quarter, the strongest pace in almost six years, amid the biggest jump in household spending since before the 2008-2009 global recession.

The rate increase was expected by just six out of 29 economists surveyed by Bloomberg with the remaining ones anticipating the bank would keep rates unchanged after increasing them for the first time in seven years in July. The odds of a rate hike at the next meeting in October are about 29 percent, based on trading in the swaps market.

The loonie traded at C$1.2240 at 11:12 a.m. in Toronto, up 1.1 percent on the day and extending its three-month advance to 10 percent, the best performance among all currencies tracked by Bloomberg.

“It is important to consider that much of the good Canadian dollar news has gotten priced in, so the burden of proof will hinge on economic momentum,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank.

While yields on Canada’s two-year bonds were above their U.S. counterparts in the run-up to the decision, a similar trend is taking shape in longer-term bonds. The rate on the five-year bonds jumped to 1.63 percent Wednesday, leaving the yield just three basis below similar-maturity U.S. Treasuries.

Faster-than-expected economic data shows that Canada’s growth “is becoming more broadly-based and self-sustaining,” the Bank of Canada said in its statement, adding further monetary decisions are not predetermined and “will be guided by incoming economic data and financial market developments as they inform the outlook for inflation.”

— With assistance by Lananh Nguyen

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