The Bank of Canada shocked the markets when it suddenly eliminated its bond-buying program in response to the consistently high inflation that has plagued the world. Original expectations were for the Bank to cut the program in half but the hawkish shift clearly highlights the willingness of the BOC to fight inflation and do what it takes to keep it under control.
Aside from the bond-buying program, the central bank also hinted at a rate hike by the middle of next year which is another variable that could change based on a variety of factors including inflation. If things do not improve, the rate hike could come sooner, according to analysts following up on the matter.
The Canadian Dollar gained from this news and moved towards the $1.2400 area while 2-year government bond yield jumped around 0.21 percentage points and above the 1% mark.
It’s worth noting that such a move by a central bank will create a divergence between currencies. While the ECB, FED and BOE are all watching inflation and hinting at higher rates in the future, the variables involved do not facilitate a straightforward decision. In fact, the FED is constantly watching for improving employment data which can seesaw occasionally and lead to delays in coming up with a monetary decision. On the other hand, the BOC took action and signaled that it’s ready to do more if needed, according to analysts.
On a different note, US stocks moved lower despite strong earnings from Microsoft and Alphabet. The move was motivated by a decline in energy stocks following a sharp drop in Oil prices. After trading above 35800, the Dow Jones Industrial Average dipped below 35500 while the S&P dipped from the 4590s to the 4550s area.
Today’s ECB event is likely to give hints at how the central bank is looking to improve economic conditions and fight inflation. The move by the BOC will not go unnoticed and may motivate the ECB and other central banks on certain actions, according to traders.
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