The Canadian dollar pulled back sharply as the Bank of Canada cut the overnight rate target by 25bps to 2.25 percent, the second reduction this month after participating in the October 8 coordinated rate cuts. While the reduction was less than expected, as a Bloomberg News poll of economists had forecasted a 50bp cut, the BOC’s policy statement suggested that additional rate cuts were on the way as they said “some further monetary stimulus will likely be required” in order to achieve the 2 percent inflation target.
Indeed, the BOC is very concerned about prospects for Canadian growth given the weaker outlooks for global demand and commodity prices, as well as the "marked tightening" in credit conditions. These factors are also likely to contribute to a drop in inflation pressures, as the BOC forecasts that headline CPI will peak in Q3 2008 and subsequently fall below their 2 percent target in 2009. The Canadian dollar may face additional declines on Wednesday as consumption numbers will be released. Canadian retail sales are expected to slip 0.2 percent, but given the 1.5 percent drop in wholesale sales, there is potential for this headline reading to fall more than expected as the wholesale figure tends to serve as a good leading indicator. The Australian dollar and New Zealand dollar also remain weak, especially as commodity prices have slumped throughout the day and ahead of the releases of Australian CPI tonight at 20:30 ET and the RBNZ rate decision tomorrow at 16:00 ET. The Australian figures are expected to show a broad pick up in inflation pressures during Q3, but given the tightness of the credit markets and the slowdown impacting the Australian economy, these CPI results are unlikely to prevent the Reserve Bank of Australia from cutting rates further. The bigger story, though, will be the RBNZ monetary policy decision as they are anticipated to slash rates by 100bps to 6.50 percent. While inflation measures remain very high, the New Zealand economy has officially fallen into recession as GDP contracted for two consecutive quarters (-0.3 percent in Q1, -0.2 percent in Q2). The key to the New Zealand dollar’s reaction, though, will be RBNZ Governor Bollard’s post-meeting commentary. If the RBNZ cuts rates by 100bps and signals that they will reduce rates further, this sentiment may be exacerbated and the New Zealand dollar will likely plunge. On the other hand, a smaller than expected 50bp - 75bp cut and comments suggesting that the RBNZ may pause next time could allow the currency to recover. Related Articles: Forex Market Weekly Outlook, 5 Key Events for the Forex Market This Week 10-19-08