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Canadian Dollar Slips as Bank of Canada Cuts Rates Less Than Expected to 2.25%, Signals More To Come

Tuesday, 21 October 2008 12:58:00 GMT  |  Terri Belkas, Currency Strategist

The Canadian dollar has pulled back 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.

The Canadian dollar has pulled back 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 with the Federal Reserve and European Central Bank, among others. However, the reduction was less than expected, as a Bloomberg News poll of economists had forecasted a 50bp cut. A look at the BOC's press release shows that they are 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. Since expansion in the country depends heavily on exports, the combination of slowing foreign demand and lower commodity prices has the potential to be highly detrimental for Canadian terms of trade, output, and labor markets. Looking forward, the BOC projects average annual growth in real GDP to slow to 0.6 percent in both 2008 and 2009, but to pick up in 2010 to 3.4 percent. Likewise, the BOC said that headline CPI should peak in Q3 2008 and subsequently fall below their 2 percent target in 2009. 

Overall, this press release suggests that the BOC will cut rates further, especially since they said that "some further monetary stimulus will likely be required." Credit Suisse overnight index swaps continue to price in 100bps worth of cuts over the next 12 months, which could add pressure to the already weakening Canadian dollar. Focusing on USD/CAD, the pair is currently testing resistance at the 61.8 percent fib of 1.4001-0.9056 at 1.2109. The next major level of resistance is at 1.2500.

Currency Performance Versus the Canadian Dollar Since Last Month

Source: Bloomberg

Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com

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