By Alastair Sharp and Fergal Smith
TORONTO, Sept 6 (Reuters) – Canada’s currency surged to its strongest level in two years, short-term bond yields hit a five-year high and the country’s main stock index slipped on Wednesday after the Bank of Canada surprised many by raising interest rates.
The local stock market turned negative as investors retreated from rate-sensitive sectors including telecoms and utilities, which typically issue debt to pay for projects and pay out dividends that become less attractive when government bond yields rise.
“The Bank made very little attempt to push back against the strength of the Canadian dollar and also very little attempt to suggest that this is merely (removing) two insurance cuts and then we are on hold for a while,” said Bipan Rai, senior macro strategist at CIBC Capital Markets, referring to a pair of 2015 rate cuts intended to combat the effect of plunging oil prices.
“As a result we have got the market pricing in potentially another rate hike before the end of this year and the strength of the Canadian dollar reflects that,” he said, adding that the currency pair could be heading back towards C$1.20.
The Canadian dollar surged more than 2 percent after the Bank of Canada’s move, which followed a rate increase in July, as the central bank left the door open to more rate hikes in 2017.
The currency hit its strongest since June 2015 at C$1.2140, while the yield on 2-year government debt jumped as much as 10 basis points to its highest since April 2012 at 1.450 percent.
“There is some concern that a rate hike is too much too fast,” said Shailesh Kshatriya, director for Canadian strategies at Russell Investments Canada.
The Toronto Stock Exchange’sS&P/TSX composite index was last down 27.87 points, or 0.18 percent, at 15,062.10, after notching solid gains before the rate announcement.
The rate hike seemed to unsettle those holding shares of the country’s banks, whose earnings growth is in part dependant on homebuyers being able to sustain their loan growth, with the sector reversing earlier gains to trade 0.2 percent lower.