Canadian Dollar Rises as Macklem Flags Two Hikes by October
Canadian dollar traders priced in two hikes by the October meeting as Canadian government bonds tumbled after Tiff Macklem said consecutive policy rate increases may be needed if oil-price inflation spreads. The move hit the two-year market first, with yields jumping as the Bank of Canada kept its policy rate at 2.25 per cent for a fourth consecutive meeting.
15.1 basis points was the jump in the two-year Canadian government bond yield, which reached around 3.03 per cent shortly after 3:30 p.m. Ottawa time. That shift left borrowers facing a higher rate backdrop after Macklem told reporters, "If this starts to happen, monetary policy will have more work to do — there may be a need for consecutive increases in the policy rate," as oil prices extended gains.
10:30 a.m. Ottawa time was when Macklem began his news conference, and Canada’s benchmark two-year note was already selling off. Global oil prices gained further after Axios reported Donald Trump said he would not lift a naval blockade of Iran’s ports until he secured a deal on that country’s nuclear program, adding fuel to the move in Canadian debt.
Macklem at 10:30 a.m. Ottawa time
2.25 per cent is where the central bank left its policy interest rate, saying the level was about right to support growth and keep inflation in check. The warning from Macklem complicated that message: if elevated oil prices embed themselves in broader price pressures, the Bank of Canada may have to tighten again sooner than traders expected.
Two-year yield crosses 3.03 per cent
3.03 per cent on the two-year yield is a level that feeds through quickly to pricing across short-term Canadian debt. Traders in overnight swaps raised their rate-hike bets, and the spread between Canada and U.S. short-term debt narrowed, leaving less room between the two markets after the comments and the oil move.
Two hikes by the October meeting is now the market’s test case, but that pricing depends on whether oil-led inflation stays contained or becomes broader. For anyone borrowing against short-term rates, the message from Ottawa was simple: the central bank is still on hold, but it is no longer ruling out back-to-back moves if energy costs keep pushing prices higher.
