Canadian Stocks and Currency Dip as Rate Hike Bets Climb

On Monday, the main stock market in Canada once again found itself in correction territory. Moreover, the Canadian dollar also declined against the US dollar, with investors raising their bets on the central banks lifting interest rates significantly higher in order to bring down inflation.

Stock Market Tumbles

There was a 2.6% fall in the S&P/TSX index on the Toronto Stock Exchange, as it closed at 19,742.56. This brought it 10.6% lower than the record high it had seen back in March. The closing of an index 10% below its record high means that a correction has occurred. This had happened to the TSX on May 11th and 12th, but it had managed to rally again.

As for the Canadian dollar, the currency was down 0.8% against its US counterpart and was trading at a value of 1.2888. This was also because the US dollar had climbed up against a basket of majors. It had reached its weakest at 1.2893, which was the lowest since May 19th.

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There was also a sharp decline in the US S&P 500, after Friday’s hot inflation numbers gave rise to investor concerns about a higher hike in the interest rates by the US Federal Reserve. Investors were also nervous that the central bank would not be able to tame inflation and this would eventually lead to a recession. An interest rate decision would be made by the Fed in its policy meeting scheduled for Wednesday this week.

Market analysts stated that global central banks were making an effort to show that they would not hesitate in hiking up interest rates and would get as aggressive as needed.

The Bank of Canada to Raise Rates

Money markets have already priced in an interest rate hike from the Bank of Canada. In fact, there is a 75% possibility that the rate would be increased by 75 basis points in the coming month, making it the biggest increase to be made since August 1988. It is expected that the interest rate in Canada will peak next year at 3.9%.

It was only two weeks ago that the investors had expected this rate to be 3%. It should also be noted that the decline in the Toronto market has been lower than other benchmarks, primarily because of its high ratio of resource shares. However, Monday saw the energy sector lose some of its gains, as it recorded a decline of 3.1%.

Meanwhile, the materials group, which includes fertilizer companies and base and precious metals miners, fell 4.8% due to a decline in prices of copper and gold. There was also a fall of 3.6% recorded in tech shares that boast sensitivity to high-interest rates. The bond yields in the country were higher, as they tracked the movements in US Treasuries. The 10-year bond reached 3.551%, which is the highest since May 2010. But, it dipped down to 3.514%. Nonetheless, it still closed with an increase of 16.1 basis points.

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