FX Thoughts - Bank Of Canada Cuts By 50 Bps 04-Mar-2008 1938 IST or 1408 GMT or 0908 EST
The Bank of Canada has cut rates by 50 Bps and issued a statement which is extremly dovish and clearly sends a message that further rate cuts are in store next month.
OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-half of one percentage point to 3 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 3 3/4 per cent.
Information received since the January Monetary Policy Report Update (MPRU) indicates that economic growth in Canada through the four quarters of 2007 was broadly in line with expectations. Domestic demand has remained buoyant, as rising commodity prices and high employment have continued to support income growth. Canada's net exports weakened further in the fourth quarter, reflecting the slowing U.S. economy and the impact of the past appreciation of the Canadian dollar. Overall, the Canadian economy remained above its production capacity at year-end. Core and total CPI inflation – at 1.4 per cent and 2.2 per cent, respectively, in January – have also been consistent with the Bank's expectations.
At the same time, there are clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected in January. This stems from further weakening in the residential housing market, which is adversely affecting other sectors of the U.S. economy and contributing to further tightening in credit conditions. The deterioration in economic and financial conditions in the United States can be expected to have significant spillover effects on the global economy. These developments suggest that important downside risks to Canada's economic outlook that were identified in the MPRU are materializing and, in some respects, intensifying.
The Bank now judges that the balance of risks around its January projection for inflation has clearly shifted to the downside, and, as a result, the Bank is lowering the target for the overnight rate. Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2 per cent inflation target over the medium term.
The Bank will publish a new projection for the economy and inflation, including risks to the projection, in the Monetary Policy Report on 24 April 2008.
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FX Thoughts - Bank Of Canada Could Deliver A Large Rate Cut 04-Mar-2008 0945 IST or 0415 GMT or 2315 EST
After the RBA hiked rates earlier today, the second big central bank meeting for the day is of Bank of Canada, which in contrast is likely to deliver its third successive rate cut of 25bps in as many meetings. A cut of 50bps could also be seen and would not be entirely surprising. The Bank of Canada has been so far been most aggressive following the US Fed and the main problem it is facing is from a Contagion effect from a possible Recession across the border in US and the resultant slowdown in Canada. The Q4 2007 annualized GDP yesterday came in at 0.8% against 3.0% in Q3, already showing the effects of a US slowdown on Canadian Economy.
The broad reasons for the BOC rate cut remains the same…
1) Fed Effect 2) Falling Inflation
1) Fed Effect: The US Fed has cut rates by 225 bps since Sep-2007 and is very likely to cut once again by 50 bps in two weeks time. The Bank of Canada has so far most aggressively following the Fed and is likely to do so in the near future as well. If there were a difference in monetary policy between the two neighbours, then the CAD would appreciate which would be very bad for the manufacturing base of Canada. Thus the Bank of Canada is being forced to follow the interest rate path of US Fed.
2) Falling Inflation: Much unlike its bigger neighbour, the United State where Inflation has been the biggest working factor which is acting as a deterrent for rate cuts, there is no such problems for Bank of Canada. Infact the Bank of Canada Core Inflation Index for January-08 was 1.4%, at its 30-Month low. This compares with the top of BOC inflation comfort zone of 2.0%.
The primary cause of the fall in Canadian inflation has been the strength of the Canadian Dollar seen last year, and also high base effect from 2007.
While the rate cut of 25 bps by BOC is already discounted in the market, any larger cut is likely to negatively impact the CAD. Nevertheless, the statement from BOC accompanying the rate cut would be important. Indications of further rate cuts would keep the CAD pressurized against fellow currency AUD, which is in a rate hiking cycle in the next few days/weeks. Other than that, a larger cut (of >25bps) would also negative for the CAD against USD atleast in the short term. There could be some changes in the statement as this is the first monetary policy meeting for the new BOC governor, Mark Carney.
Technical View on USD-CAD:
After the sharp fall in the early part of last week, USD-CAD had a recovery on Friday, which has continued so far. However, still the larger trend of USD-CAD remains bearish and therefore the pair could top around, possibly near 1.0020 to fall again. Above that the Resistance would come in at 1.0100. On the downside the immediate Support would come in at 0.9820 and then at 0.9710. The bias for USD-CAD remains bearish in the longer term and selling rally would be recommended.
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