Canadian Dollar Falls as Bank of Canada Cuts to 0.50%, Signals Potential for Quantitative Easing, Additional Cuts

The Canadian dollar has pulled back sharply on news that the Bank of Canada cut rates in line with expectations by 50 basis points to a record low of 0.50 percent and indications the Bank may cut rates further and implement quantitative easing measures.

Indeed, the BOC's monetary policy statement said that "the target for the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up," and because the overnight target rate was already so low, "the Bank is refining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easing. In its April Monetary Policy Report, the Bank will outline a framework for the possible use of such measures."

Conditions in the Canadian economy have worsened markedly in recent months, with the US recession proving to be "particularly challenging" for Canada. However, the Bank has cited the stabilization of the global financial system as a "precondition for the global and Canadian economic recoveries," which leaves the "timely implementation of ambitious plans in some major countries to address toxic assets and recapitalize financial institutions" as being "critical in this regard." Ultimately, the Bank may find that the situation is out of their hands until the second half of 2009, when they expect their past policy actions to start to have an impact. Furthermore, the Bank sees the Canadian economy as being likely to experience a faster recovery compared to most other industrialized economies due to "the underlying strength of the Canadian economy and financial sector."

In the near-term, the BOC's rate decision and statement may leave potential open for further Canadian dollar declines and a USD/CAD break above the 2008 highs near 1.3000 (see charts below), but in the long run, the prospect of a rapid recovery in the nation may plant the seeds for gains in the currency.

DailyFX

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