What Will Happen to the Economy?: Canadian and Australian Policy Makers Are Worried About Fed Monetary Tightening

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RBA and BOC are weary about the performance of their respective currency as it may foreshadow future economic performances.

The Canadian currency has fallen 1.1% against the US dollar since last Friday, despite the Bank of Canada delivering a more significant boost than some traders expected.

Officials have signalled that they may suspend their nine-month tightening cycle. The Aussie was barely altered even as the Reserve Bank of Australia raised again. Policymakers have indicated that they are nearly finished hiking interest rates.

The end of central bank tightening initiatives is a significant milestone. The Fed is projected to continue raising interest rates to around 5% by March, which jeopardises economies.

Money markets predict that Canada’s rates will peak slightly above 4.5% by early 2023, while Australia’s benchmark might reach 3.6%.

Additionally, the loonie could tumble to 1.38 per US dollar by the end of the year, but this may only last for a while as the Canadian currency is still considered oversold. The RBA was the first developed country to switch to quarter-point hikes in October, and it has hinted at a possible pause to analyse the impact of the movements thus far.

More central banks are expected to scale down the pace of tightening next week, with markets pricing in a modest 50 basis point rate boost apiece from the Fed, Bank of England and European Central Bank.

Lee Hardman, MUFG Bank Ltd. currency analyst, said, “It could be another leg lower from here if markets start to speculate more seriously on what happens after a pause.”

On Wednesday, the BOC raised rates by 50 basis points, contrasting with the usual assumption that central banks will progressively lower the pace of tightening before stopping. This stop signal was accompanied by a considerable rate jump, which caught many market players off guard.

“Markets are expecting many central banks to reach a peak in rates next year, but if they do it in an abrupt way or stop the hiking cycle sooner than expected, that could have a negative impact on their currencies,” he added.

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