Bank of Canada surprised the currency market by taking its overnight interest rate to a mere 25bp becoming the second lowest yielding currency in the G10 universe matching the rates of US and Switzerland.
In released statement the Bank noted that “In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than- expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 percent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual.”
The bank further went on to say that it will likely keep this rate until the second quarter of 2010 as it allows the impact of credit easing to filter through the Canadian economy. By providing guidance the BOC has tacitly confirmed that it has run out of room for any further interest rate cutting. By keeping rates at 25bp Canada joins Japan, US and Switzerland as a quasi ZIRP practitioner.
Although the BOC did not explicitly state that it will commence quantitative easing in the foreseeable future, It left the door open to such possibility by noting that, “The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework to be outlined in the Bank’s Monetary Policy Report on 23 April.”
Unsurprisingly, the Lonnie lost one big figure in the aftermath of the announcement with USD/CAD reaching a high of 1.2495. However, having gained nearly 500 points in less than a week USD/CAD& nbsp; is likely to encounter some resistance at the 1.2500 level. Furthermore, with rates now matching those of US the pair is unlikely to be as affected by monetary policy moves in the near future. Instead, the direction of USD/CAD& nbsp; will be driven more by the price of oil rather than any other fundamental factor.
In fact the weakness in the loonie over the past several days is as much a function of the sharp drop in crude as it is the result of dovish monetary policy. If oil price once again rise above the $50/bbl barrier USD/CAD& nbsp; could revisit the 1.2000 level. For time being the unit remains weak as neither oil prices nor the fundamentals of the Canadian economy offer any support.
