Forex Investment and Currency Trading

The Bank of Canada delivered one last 25bps rate cut today to leave the overnight rate at an effective floor of 0.25%.
 
Using a surprising degree of transparency, the Bank stated that it will leave the overnight rate there until June 2010 to flatten the yield curve.
 
The Bank also downgraded its economic forecasts for both 2009 and 2010.
 
The comments on policy alternatives did not include much detail, but they opened the door to quantitative easing and market expects more on that front when the Bank releases the Monetary Policy Report on Thursday.
The Bank of Canada cut the overnight rate by 25bps [...]

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The Bank of Canada’s updated economic forecast is in line with market outlook. Market expects the economy to grow by 1.6% this year and 2.3% in 2009. The view remains that Canada’s trade sector will be the main impediment to growth as a result of the weaker U.S. economy and the high level of the Canadian dollar. Credit market conditions have tightened since the credit market crisis last summer, although this has done little to slow business and household credit growth as the improvement in Canada’s terms of trade bolsters incomes.
 
Canada’s labour market continues to be the easiest way to see [...]

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The Fed and the Bank of Canada appear to have shifted into data-watching mode following the 25 basis-point ease in the United States and the Bank of Canada’s 50 basis-point slice to the overnight rate in April. The Fed’s policy statement suggested that committee members view the cumulative 325 basis points of easing plus non rate-related liquidity measures as providing the foundation for financial markets to function and the economy to recover. The statement did not signal a definitive end to rate cuts but more of a switch to a “wait and see” stance.
While no significant pick-up in growth is [...]

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Economic Fundamentals versus Rhetoric
-There is an interesting contrast in the report between the economic assessment and the forward-looking aspects of the statement. The economic, inflation, and credit crunch outlook are all rather dreary, yet the Bank of Canada then waffles a little on the nature of further cuts. Why is this?
-The BoC downgraded its Canadian GDP forecast for 2008 and 2009 from 1.8% and 2.8% to 1.4% and 2.4%, respectively. It now projects that the Canadian economy will not return to full capacity until mid-2010, and that Canadian inflation will remain too low until 2010 (instead of 2009) as well. [...]

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