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Bank of Canada cuts rate 50bp to 1.00%

Wed, Jan 21 2009, 05:37 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank  |  View company's profile

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News and views

Bank and sovereign credit risk heightened this week, the market wondering which country will receive the next downgrade. Standard & Poor’s and Fitch both dismissed rumours that the UK was next on the block. The sentiment surrounding banks was illustrated by the US S&P banks index falling 16% last night, against the broader S&P500 down 3.8% at the NZ open. Bank and sovereign credit spreads have also widened significantly, in this latest wave of risk-aversion to grip the world. The remaining asset classes behaved much as one would expect against this backdrop – the dollar index (DXY) around 2% higher, gold the same, and copper -3%. Oil bucked the trend, partly due to wintry weather in the northern hemisphere, and futures contracts rolling from February into March.

The NZD is in free-fall, with no positive fundamentals to support it. Yesterday’s weakerthan- expected CPI number was the second negative data shock to the currency this year (the first was the NZIER survey), and offshore markets are only too happy to sell any short-term strength. A range of 0.53 to 0.5350 held until Europe’s mid-morning, when it broke down in accelerated fashion, and sits at the low of 0.5200 as we write.

AUD approximated the same pattern, ranging between 0.6570 and 0.6670, before the break down took it to the 0.6490 current low. AUD/NZD stepped higher last night, finding resistance at 1.25, and settling back at the current 1.2450. Look for higher levels here, as the interest rate differential between NZ and Australia will reduce further next week.

EUR continued to be punished on news of European economic deterioration gathered steam, and on rumours the Russian central bank sold EUR heavily to support the rouble. From the Europe open, it was a steady decline from 1.30 to 1.2850. GBP was the subject of sell recommendations from leading pundits, and once historical support at 1.4350 broke, there was daylight until 1.39. The JPY was a rock of strength, outpacing even the USD, from 91 during Europe, to 89.80 here.

No US data to report.

Japan tertiary index falls close to expectations. The November tertiary index declined 0.9%mth, close to median projection for -0.8%, and left this gauge of service sector activity slipping to -2.4%yr from -1.4%yr in October. Together with the record 8.5%mth plunge reported in November industrial production, it is projected translating into a steep 2.5%mth drop in the all-industry index in November.

German ZEW analysts’ survey up from –45 to –31 in Jan. This survey of German analysts showed less pessimism re the outlook, no doubt reflecting the latest rate cuts and the second fiscal package. However the current assessment fell from –65 to –77, as analysts acknowledged the likely steep drop in Q4 GDP growth.

UK CPI falls from 4.1% yr to 3.1% yr in Dec. Earlier than usual December sales and the VAT cut were the main factors behind the CPI decline. However the VAT cut was not passed on immediately by all retailers, so there is a likelihood of a further steep VAT-related decline in the CPI in coming months, in addition to the downward impact from favourable base effects and lower food and fuel prices.

Bank of Canada cuts rate 50bp to 1.00%. The statement noted that “Guided by Canada’s inflation-targeting framework, the Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required to achieve the 2 per cent target over the medium term.” That is a soft hint that rates could be cut even further.

Canadian manufacturing shipments slump 6.4% in Nov. Down for four months running now, the latest drop was largely energy and aerospace related.

Outlook

There should be some support at 0.5190 today, but the market will see any such rally as an opportunity to sell more NZD. After that, 0.50 should be a congested area, and ultimately we continue to target around 0.48. Retail sales this morning has a risk of being weaker than expected, which would punish the currency further.

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Published on  Wed, Jan 21 2009, 06:19 GMT

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