Tuesday, December 04, 2007

Canadian dollar tumbles after rate cut - The Cut Works!


Globe and Mail Update

The Canadian dollar hit its lowest level since September after the Bank of Canada cut its key lending rate Tuesday, citing a worsening U.S. housing market and turmoil in credit markets.

The currency shed more than a cent, trading at 98.80 cents (U.S.) from Monday's close of 99.98 cents, to its lowest level in two-and-a-half months. It closed Tuesday's session at 98.78 cents, down 1.20. Lower interest rates tend to diminish the allure of a country's currency.

The loonie has tumbled 11 per cent from last month's peak as a growing number of Canadian economic reports have highlighted a slowdown in exports and consumer spending.

“Overall sentiment certainly seems to have changed over the last few weeks, moving against the Canadian dollar,” said Camilla Sutton, currency strategist at Bank of Nova Scotia. She sees the loonie staying below parity for the rest of this month before appreciating again in the first quarter.

“The bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009,” the bank said. “In light of this shift, the bank has decided to lower the target for the overnight rate.”

Traders betting in futures markets are pricing in an 80-per-cent chance of a 25 basis-point rate cut in the first quarter, and are fully pricing in a second such cut in the second quarter of next year, according to Ideaglobal.

“We expect this to continue weighing on the Canadian currency moving forward,” said David Powell, Ideaglobal's currency analyst in New York, in a note.

Most strategists still believe the Federal Reserve will be more aggressive in cutting rates than the Bank of Canada though -- and that may be limiting the loonie's decline. Almost half of traders now believe the Fed will cut 50 basis points at its meeting next week.

The Canadian dollar had soared as high as $1.10 in early November before settling around the parity mark – one of the most turbulent months for the currency in at least a decade – something the bank noted in today's statement.

“In the context of exceptional volatility in global financial markets, the Canadian dollar spiked well above parity with the U.S. dollar in November,” though it has recently moved to where the central bank had expected it would be, the bank noted.

Tuesday's statement gave little indication of whether interest rates will fall further. The central bank next meets on Jan. 22 in what will be Governor David Dodge's last decision before Mark Carney assumes the mantle.

“The door is open to further rate cuts although it is not a fait accompli at this particular point in time,” said Stewart Hall, market strategist at HSBC Securities (Canada).

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