During early deals on Wednesday, the Canadian dollar plunged to new multi-year lows against the US dollar and the Japanese yen. Meanwhile, the loonie showed strength against the currencies of Europe and Australia. The Canadian currency climbed to an 8-day high against the euro.
Warning that the outlook for growth and inflation in Canada is now more uncertain than usual, the Bank of Canada announced yesterday morning that it is lowering its key interest rate by one-quarter of a percentage point to 2.25 percent.
The BoC joined six other central banks around the world in offering an unprecedented coordinated half-percentage point rate cut earlier this month. Analysts were expecting the Bank of Canada to slash rates by an additional half-percentage point this morning.
In its statement accompanying the rate decision, the BoC noted that there are three major interrelated developments are having a profound impact on the Canadian economy.
According to the central bank, the intensification of the global financial crisis has led to severe strains in financial markets. The BoC also suggested that the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession. Third, sharp declines in many commodity prices have weighed on the Canadian economy.
However, while the BoC expects growth to be sluggish through the first quarter of next year, it said that it expects growth to pick up over the rest of 2009 and to accelerate in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth.
The Canadian dollar has also been hit by softening oil prices, which accounts for about 10 percent of the country's export revenue.
Oil fell for a second day today, extending its 4% slide on Tuesday, on mounting worries that output cuts by OPEC would not be enough to offset slowing energy demand. At 00:08 a.m. ET, oil was quoted at $69.72, down $2.46 or 3.4%.
Against the US currency, the Canadian dollar edged down to 1.2308 at 12:35 am ET Wednesday. This set the lowest point for the loonie since June 29, 2005. If the Canadian currency drops further, 1.248 is seen as the next target level. The dollar-loonie pair closed Tuesday's North American session at 1.2144.
Against the European currency, the Canadian dollar showed strength during Wednesday's early deals. At 12:25 am ET, the loonie reached an 8-day high of 1.5663 against the euro, compared to 1.5865 hit late New York Tuesday. The euro-loonie pair is currently trading at 1.5813.
The Canadian currency gained ground after hitting a low of 0.8298 against the Australian dollar during early Asian deals on Wednesday. At 12:25 am Eastern Time, the loonie reached a high of 0.8160 against the Aussie, compared to Tuesday s closing value of 0.8152.
Inflation in Australia increased by more than expected in the September quarter. The Australian Bureau of Statistics reported today that the country's Consumer Price Index for the three months to September increased 1.2 percent over the previous quarter. Annual CPI grew to 5.0 percent, the CPI growth was the fastest seen since 2001.
Westpac commented today that it is sticking with a 50bp cut in November. However, the risks are now pointing towards a smaller cut of 25bp and the situation will remain fluid over the next two weeks.
Since the RBA delivered the surprise 100 bp rate cut and markets quickly moved to price in a 75-100 bp cut on November 4 all domestic factors have moved toward pointing to a smaller cut than expected by markets. Westpac has always maintained that the next move should be 50 bps and markets are now priced for that event but the risks are now toward something even less.
The Canadian dollar that closed Tuesday's New York deals at 82.53 against the Japanese yen declined to 80.89 at 12:40 am ET Wednesday. This set the lowest point for the pair since June 2004. On the downside, the loonie-yen pair is likely to target 78.5 level.
The Italian August retail sales report is expected to influence trading in the European session today.
August Retail Sales and September month Leading Indicators are the major economic releases expected from Canada today.
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