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Canada's Financial System Stability at Risk; Loonie Extend Losses

Canada's Financial System Stability at Risk; Loonie Extend Losses

2011-12-08 20:31:00
Trang Nguyen,
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THE TAKEAWAY:Bank of Canada Published Financial System Review > Risk of Stability is High over the Past Six Month >Loonie Extend Losses

In the semi-annual Financial System Review released today, Bank of Canada warned of high risk to stability due to escalated debt crisis in Euro area, weaker outlook for global economic growth and excessive risk-taking in international financial market. Though Canadian financial system remains strong and banks have not experienced liquidity problem like their international peers, risks to the stability emerged and considerably elevated over the past six month, including:

  • the spillovers associated with a further escalation of the European sovereign debt crisis;
  • an economic downturn in advanced economies that could be amplified by remaining weaknesses in the balance sheets of global banks;
  • a disorderly resolution of global current account imbalances;
  • financial stress in the Canadian household sector; and
  • a prolonged period of low interest rates, which may encourage imprudent risk-taking and/or erode the long-term soundness of some financial institutions.

More seriously, those principle risks are “highly interconnected” and “mutually reinforcing”. Prolonged sovereign crisis in Eurozone dampens global economic growth, forcing the central bank to reduce key interest rate to record low. In turn, continued low interest rate adversely affects insurance companies and defined-benefit pension fund and mounts up household borrowing in Canada. As those risks to the stability have intensified over time, Bank of Canada presented more policy actions to eliminate them and stressed its mandates to maintain the momentum of regulatory reform to enhance the financial and banking system.

Mitigating the risks to the stability of the international financial system requires a wide range of additional policy actions. In the near term, the most pressing issue is to address funding, fiscal and governance challenges in the euro area. Credible measures to provide financial assistance to governments with liquidity problems and to solidify the banking sector are urgently needed to provide time to return sovereign debt burdens to a sustainable path and to strengthen the fiscal and governance arrangements within the European Monetary Union. The measures taken to date have repeatedly fallen short of what is needed.

USD/CAD 1-minute Chart: September 29, 2011

120811_BOC_Financial_System_Reivew_body_Picture_4.png, Canada's Financial System Stability at Risk; Loonie Extend Losses

Charts created using Strategy Trader– Prepared by Trang Nguyen

Canadian dollar weakens versus most of major currencies except its Australian trading partner in North America trading session today and continues to slide following the Financial System Review report. The 5-minute USDCAD chart above suggests further bearish extension regarding to the loonie. The loonie traded approximately 60 pips lower versus the greenback, pushing the USD/CAD pair up to 1.0160 to 1.0220. TheRelative Strength Indicator, an indicator of overbought or oversold reactions in the monetary market, climbed above 70-level, signaling that traders have aggressively purchased the greenback while selling off loonie. At the time this report was written, the loonie depreciated about 1 percent against the U.S. dollar, trades at $1.02209 per greenback in Toronto.

--- Written by Trang Nguyen, DailyFX Research Team for DailyFX.com

To contact Trang, email tnguyen@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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