BOC Undermines Canadian Dollar

The Bank of Canada interest rate decision is clearly a short-term negative factor for the Canadian currency. The downbeat economic assessment also shows that there is a lack of confidence in US and global growth prospects given the Canadian dependence on trade. The Canadian outlook, therefore, is also likely to undermine wider risk appetite. The one saving grace for the currency is the decision not to commit to immediate quantitative easing. Nevertheless, given the global risk, the Canadian dollar is vulnerable to a decline to 1.28 against the US dollar over the next two weeks.

In an unexpected decision, the Bank of Canada has cut interest rates by a further 0.25% to 0.25%, narrowing the operating band to 0.25%. The bank also stated that the rate can be expected to stay at the 0.25% level until the end of the second quarter of 2010 depending on the inflation outlook. It expects the inflation risks to be tilted to the downside.

The central bank has revised the 2009 GDP forecast to -3.0% from -1.2% previously while it has revised down the underlying growth potential. As far as non-standard measures are concerned, the bank will introduce a framework for potential quantitative easing, but it has not committed itself to immediate action.

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