Surprise rate hike by Bank of Canada sends ripples through Asian markets

June 08, 2023 (MLN): Asian shares slipped on Thursday after a surprise interest rate hike by the Bank of Canada revived worries that U.S. rates could stay higher for longer and the Federal Reserve could remain hawkish when it meets next week, as Reuters reported. 

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.53%, while Japan's Nikkei edged 0.08% higher. Australia's S&P/ASX 200 index eased 0.09%.

The Bank of Canada (BoC) surprised markets on Wednesday by hiking its overnight rate to a 22-year high of 4.75%, with traders expecting another increase next month to ratchet down an overheating economy and stubbornly high inflation.

The BoC had been on hold since January to assess the impact of previous hikes.

"The BoC appears to feel that the resiliency in the economy allows it to be more aggressive in bringing inflation under control," said Ryan Brandham, head of global capital markets, North America at Validus Risk Management.

The move from the BoC comes after Australia's central bank also stunned markets by hiking interest rates earlier this week. The Reserve Bank of Australia also warned of more rate hikes to temper rising pricing pressures.

Two central banks in a row have now surprised hawkish, raising the risks of a Fed surprise next week, Saxo Markets strategists said in a note.

Markets are now pricing in a 68% chance of the Fed standing still next week, compared to 78% just a day earlier, the CME FedWatch tool showed. Traders are pricing for a 25 basis point hike in July.

Economists polled by Reuters expect the Fed to not raise rates at its June 13-14 meeting, but a significant minority expects at least one more hike this year.

More than 90% of economists, 78 of 86, polled during June 2-7 said the Federal Open Market Committee would hold its federal funds rate at 5.00%-5.25%.

China shares slipped 0.3% , while Hong Kong's Hang Seng Index fell 0.57%.

Data on Wednesday showed May exports in China slumped 7.5% year-on-year, the biggest decline since January and far below the 0.4% decline analysts expected.

"The weak export numbers will have observers looking for a new round of policy stimulus," Saxo strategists said.

Treasury yields were stable in early Asian hours after surging overnight after the move from Canada's central bank.

The yield on 10-year Treasury notes was up 0.7 basis points to 3.791%, while the yield on the 30-year Treasury bond was up 0.2 basis points to 3.944%.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 0.4 basis points at 4.554%.

In the currency market, the dollar index, which measures the U.S. currency against six major peers, eased 0.029%, with the euro up 0.09% to $1.0707.

The yen strengthened 0.14% to 139.91 per dollar after revised data showed Japan's economy grew more than initially thought in January-March.

The Canadian dollar rose 0.08% to 1.34 per dollar, while Turkey's lira hit a record low against the dollar as the newly re-elected government appeared to loosen stabilizing measures after signaling a pivot to more orthodox policies.

U.S. crude futures rose 0.03% to $72.55 per barrel and Brent was at $76.93, down 0.03% on the day.

Gold prices steadied on Thursday following a 1% drop in the previous session. Spot gold rose 0.3% to $1,944.85 an ounce. U.S. gold futures climbed 0.02% to $1,943.10 an ounce. [GOL/]

Bitcoin steadied in Asian hours and was last at 26,445 after sliding 3% overnight.

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