Canada Morning: C$ Dn As Initial Post-Rate Cut Rally Fades

TORONTO (Dow Jones)--The Canadian dollar is lower early Wednesday, having weakened off in a still risk-averse environment following a brief earlier rally in the wake of the co-ordinated interest rate cuts by the Bank of Canada and other major central banks.

The U.S. dollar was trading at C$1.1148 at 10:25 a.m. EDT (1425 GMT), from C$1.1034 at 8:00 a.m. EDT (1200 GMT) and C$1.1064 late Tuesday.

After hugging the C$1.1000 region through much of overnight trading, the Canadian dollar managed to rally back as far as C$1.1000 following news around 7:00 a.m. EDT (1100 GMT) that the Canadian central bank had joined the Federal Reserve, the Bank of England, the European Central Bank, and the Swiss and Swedish central banks in lowering their respective benchmark rates by 50 basis points.

The Bank of Canada's statement justified its participation in the co-ordinated action in terms of tighter Canadian credit conditions as a result of the recent intensification of the global financial crisis, in addition to acknowledging waning global inflationary pressures and mounting downside risks to economic growth.

The cuts instilled a brief jolt of confidence to fraying global financial markets, but risk averse attitudes soon regained ascendency as stock markets in Europe and North America continued to struggle.

Sustained risk aversion quickly took the Canadian dollar off its intraday highs and deposited it back through the C$1.1100 mark.

The Canadian currency is now trading narrowly in the C$1.1140 area, in fresh 17-month low territory as currency players nervously digest the day's events and watch the reactions of equities and other correlated markets for directional cues.

Currency strategist Shane Enright of CIBC World Markets in Toronto said that based on levels in many interest rate futures markets, rate cuts of the type seen Wednesday "weren't a huge surprise to markets," and the Canadian dollar remains fixated on the gyrations of sentiment in equities markets for direction.

"I think we're going to be very much tied to how the asset markets respond," he said. "People want to see if this latest measure is going to be enough to at least stabilize the markets, and whether the bleeding stops, and maybe currencies can get a bit of short-term relief if that can happen."

Enright added however, that technical indicators remain bearish for the Canadian dollar given the huge scope of its recent losses, and it wouldn't be surprising to see the currency weaken further into the C$1.1200 to C$1.1400 region in a relatively short time.

Canadian bonds are narrowly mixed with shorter-dated bonds outperforming the rest of the market in the wake of Wednesday's central bank rate moves. The benchmark Canada 10-year bond's yield is at 3.55% from 3.47% late Tuesday, while the benchmark 2-year yield has fallen to 2.15% from 2.31% a day earlier.

These are the exchange rates at 10:25 a.m. EDT (1425 GMT), 8:00 a.m. EDT (1200 GMT), and late Tuesday.

USD/CAD 1.1148 1.1034 1.1064

EUR/CAD 1.5255 1.5108 1.5076

CAD/JPY 89.68 89.10 91.53

-By Paul Evans; Dow Jones Newswires; 416-306-2022; paulr.evans@dowjones.com

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(END) Dow Jones Newswires

October 08, 2008 10:33 ET (14:33 GMT)


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