Sign in Subscribe
Financial markets

Canadian Bonds and Dollar Rally, Paving Way for Bank Rate Decline

Strategic Insights

— 2 min read

The recent Ontario budget and the decision of Standard & Poor's Corp. to maintain the province's credit rating have led to a shift in sentiment among investors, causing Canadian bonds and treasury bills to rally. This, combined with the dollar's gain in value, has paved the way for a decline in the key bank rate. The Bank of Canada is expected to lower the rate by 20 basis points today, despite lingering concerns about inflation in the United States, which could lead to an upward push in interest rates.

Key Takeaways:

  • The Ontario budget and the decision to maintain the province's credit rating have ended fears of a downgrade, leading to a rally in Canadian bonds and treasury bills.
  • The dollar gained value, ending the day at 72.74 cents (U.S.), up 0.14 cents, which is expected to contribute to a decline in the bank rate.
  • The Bank of Canada sold the currency at 72.81 cents to slow down the sharp gains that market players said was fueled by speculators.
  • The central bank rate is set each week at one-quarter of a percentage point above the average yield on three-month treasury bills.
  • Analysts are split over whether the U.S. Federal Reserve will bump rates up by another quarter of a percentage point or decide on a more dramatic half-point increase at today's meeting of its policy-making Federal Open Market Committee.
  • The Fed move could determine whether U.S. banks increase their prime rates, which could lead to higher borrowing costs in Canada.
  • The federal funds rate in the U.S. is 3.75 per cent, three-quarters of a percentage point above its level in early February.
  • The impact of the Fed's move is expected to be more muted because it has been expected for some time, but a 50-basis-point hike in the federal funds rate could lead to "a couple of days of chaos" in financial markets and push the Canadian prime rate higher.

Statistics:

  • 20 basis points: expected drop in the Bank of Canada rate today from last week's setting of 6.61 per cent.
  • 6.61 per cent: last week's setting of the Bank of Canada rate.
  • 6.15 per cent: rate at which the Bank of Canada sold treasury bills yesterday to keep the rally under control.
  • 72.74 cents (U.S.): dollar exchange rate at the end of the day.
  • 0.14 cents: increase in the dollar's value.
  • 12,500: number of companies represented by the National Association of Manufacturers.
  • 6.75 per cent: cost of loans for the banks' most creditworthy customers in Canada and the United States.
  • 50-basis-point hike: expected increase in the federal funds rate.
  • 3.75 per cent: federal funds rate in the U.S.

Sources:

  • Reuters News Agency
  • The Globe and Mail (unnamed article)
  • Standard & Poor's Corp.
  • MMS International (Robert Palombi, economist)
  • Toronto Dominion Securities Inc. USA (David Walker, senior manager of foreign exchange products)
  • The National Association of Manufacturers (Jerry Jasinowski, president)

Read more