Canada Goes Japanese

Canada's decision to target monetary reserves of C$ billion is textbook “quantitative easing” (not only credit easing), which is the way the Bank of Japan announced policy easing in 2002-04. Canadian dollar damaged across the board as the Bank of Canada is the latest central bank to dive into quantitative easing by unexpectedly cutting rates by 25-bps to a historical low of 0.25%, revising down its 2009 GDP growth forecast to -3% from previous -1.2% and revises 2010 GDOP growth forecast to +2.5% in 2010 from earlier +3.8%. Market was expecting rates unchanged, followed by an explanation of its intentions on Thursdays' policy update. But decision to balance a target balance is weighing on the loonie across the board. Considering the escalating positive correlation between CAD and equities (+0.74 since April and +0.73 since Jan) any further deterioration in risk appetite is to magnify losses in CAD. USDCAD seen extending gains towards 1.2650, CADJPY eyes 75.70 and EURCAD at 1.6360.

Ashraf Laidi
http://www.ashraflaidi.com