On Oct 24, Bank of Canada (BoC) raised its key interest rate by a quarter point to 1.75%, marking its third rate hike this year and fifth from 2017, when it started to raise rates. This rate hike was already expected and priced in by the markets but the hawkish tone of the central bank was a surprise to many. More rate hikes are expected within a short span of time with central bank pegging the neutral rate in the range of 2.5%-3.5%. Gold price in Canadian dollars ended the day 0.6% down.
“The Canadian economy continues to operate close to its potential and the composition of growth is more balanced” per the bank statement. The rates had not gone beyond the 1.5% mark since December 2008 when the banks had made a three quarter point cut to the rate from 2.25% to counter the financial crisis.
The economy is forecast to grow at the rate of 2.1% for this and next year but slow down to 1.9% in 2020. BoC highlighted that it is keeping an eye on the how the increase in rates are effecting rising household debt and indicated that trade war between Beijing and Washington will weigh on global growth and commodity prices.
This happens to be the apex’s bank first policy decision since Canada agreed with the United States and Mexico earlier this month on an updated North American free trade deal. “The new U.S.-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment,” the bank said in a statement on Oct 24.
Post USMCA, BoC expects trade tensions between the two countries to mellow a bit. In July, the business investments were expected to come down by 1.4% till the end of 2020 due to the counter moves made by both countries on each other’s goods. However, estimates have been revised to 0.7% now. Exports have also been benefited by the new agreement as they are expected to go down by 0.3% in comparison to previous prediction of 0.7%.
Inflation reached the 2.7% level in the third quarter but is expected to come down to 2% level as prices went up temporarily due to a hike in gasoline prices, air fares and minimum wages in some provinces, effects of which have faded away
The rate hike puts the spotlight on the following Canadian ETFs that have been suffering year to date:
iShares MSCI Canada ETF
This fund tracks the MSCI Canada Index and provides exposure to mid and large-cap companies. It comprises 92 holdings. Financials (41.4%) and Energy (20.5%) occupy double-digit weights in terms of the sectors targeted. AUM is $2.8 billion and expense ratio is 0.49%. The fund has lost 8.5% year to date. It carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
JPMorgan BetaBuilders Canada ETF
It tracks the Morningstar Canada Target Market Exposure Index. The index is free-float adjusted market-cap weighted, consisting of stocks traded primarily on the Toronto Stock Exchange. It comprises 94 holdings, with Financials (40.5%), Energy (19.9%) and Industrials (10.6%) being double-digit sectoral targets. AUM is $1.7 billion and expense ratio is 0.19%. It has lost nearly 6.5% since its inception in early August.
Invesco CurrencyShares Canadian Dollar Trust
It is designed to track the price movements of the Canadian dollar and has nearly $158.2 million worth of assets under management. The issuer charges 0.4% as expense ratio. It has lost 3.6% year to date and carries a Zacks ETF Rank #3 with a Medium risk outlook.
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