Daily Commentary BY THE CURVE TEAM –

Canada Continues to Move Away from an Accommodative Setting

25th October 2018

The Reserve Bank of Canada pressed ahead with their 3rd interest rate hike this year to move up 25 bpts to 1.75%. This is the 5th hike in this cycle and contributed to a jump in the Canadian dollar overnight to be at 1.3040 up from 1.2825 earlier in October. The path of rate rises toward a neutral rate settings is forecast at this stage to involve at least 3 more hikes to position the rate between 2.50% minimum and a high point of say 3.50%.

A strong rally in US 10 Yr Treasuries overnight is taking the level back toward to break out level of 3.05%. The yield fell from 3.15% yesterday to 3.10%. The 2, 5 and 7 yr auctions this week are largely placed and so they advance to improve capital gains is now underway. The challenge will be whether we advance below 3.05% and then the key level of 3.00%. I doubt this given the regular debt auction program in the week and fortnights ahead.

All global share markets are continuing a solid retracement of their 2018 gains. Tighter global financial conditions are making the availability of credit and its price change sharply for recent abundance and low cost. These are two powerful forces, which are taking on the characteristics of value dilution rather than value creation. The global growth profile and corporate earnings per share forecasts remain solid but credit is a key component, which is highly volatile at present. Month end valuations and the ongoing market psychology in the new month will set the tone for the future short-term momentum and direction.

Today’s graph depicts the Dow’s current retracement is approaching the low point of January – March’s fall. Another 1000 points lower and we will breech the level of 23,533 of 23 March 2018.

Peter Sheahan

Director - Institutional Markets