Tuesday April 22, 2008 - 12:43:38 GMT
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Market Preview: Loonie and CGBs Unlikely to See Big Moves if BOC Cuts 50 bps (Repeat)
08:13 04/22 (CEP News) â€“ A half-point cut from the Bank of Canada is
strongly priced into markets, but itâ€™s not a sure thing. Strategists
say fixed income and foreign exchange markets are likely to be volatile
following Tuesdayâ€™s rate decision.
Overnight indexed swaps and
BAX contracts are pricing in an approximately 95% chance the Bank of
Canada will cut the target rate by a half point to 3.00%. Max Clarke,
fixed income strategist at IDEAglobal, said there is a broad consensus
for a half-point but itâ€™s not a certainty.
â€śThereâ€™s some risk they might only do 25 [basis points],â€ť Clarke said,
noting the Bank of Canadaâ€™s penchant for surprising the market.
Clarke said CGBs will initially sell off, then prices will plateau
close to their current levels if the bank cuts by only a quarter point.
â€śThere would be a sell off but you should see some sustained pressure
to increase prices. Conditions arenâ€™t going to suddenly turn,â€ť he said.
Several strategists said that traders have attempted to scale back
expectations of a half-point cut because worries about worldwide
inflation have been growing. If the Bank of Canada cuts by 50 basis
points as expected, June futures are pricing in only a 50% chance of an
additional quarter point cut.
â€śThe market has in its mind that the Fed isnâ€™t going to do much more
than another 25 [basis points] and thatâ€™s probably playing into
expectations to some degree,â€ť said Shaun Osborne, chief currency
strategist at TD Securities.
Given the uncertainty of the market going forward, Osborne expects the
statement accompanying the rate decision to be closely scrutinized.
â€śGiven that a 50 basis point cut is pretty much factored in here I
donâ€™t know if it will make that much of a difference. It will be more
about the tone of the statement,â€ť he said.
In the statement from the March 10 decision where the Bank of Canada
cut rates by 50 basis points, policy makers reasoned that though
â€śdomestic demand has remained buoyant,â€ť the U.S. economy was likely to
â€śexperience a deeper and more prolonged slowdown than had been
projected.â€ť On inflation, the statement said the balance of risks â€śhas
clearly shifted to the downside.â€ť
In his most recent comments at the G7 summit in Washington, Bank of
Canada Governor Mark Carney continued to signal worry about a U.S.
He told CEP News it has become clear that the U.S. slowdown has been
"more marked and more prolonged" than the BOC had expected. But more
important than determining whether the present growth in the American
economy is flat, slightly negative or slightly positive, he said, is
the speed of recovery as it heads into 2009. "Thatâ€™s what weâ€™re
thinking through now."
Osborne said comments about the U.S. economy will provide strong
insight into the central bankâ€™s future course of action. He said the
Canadian dollar could sell off if thereâ€™s a good indication the
situation globally and in the U.S. is worse than they had expected.
â€śThey could also swing the other way and be a little more constructive.
That will probably be a pretty significant variable,â€ť Osborne said.
The Canadian dollar has traded within three cents of parity since
mid-November and Osborne expects that to continue. â€śWeâ€™re still stuck
in this range. Weâ€™ve had a number of different variables that could
have had a significant impact on the Canadian dollar over the last few
weeks that really havenâ€™t had any effect,â€ť he said.
Shane Enright, currency strategist at CIBC World Markets, expects a
half-point cut but said the Canadian dollar could test the upper end of
the range if the Bank of Canada surprises with a 25 basis point cut.
â€śI would expect a significant reaction. It would push us to the strong end of the range,â€ť Enright said.
Even if the bank cuts by 50 basis points and isnâ€™t overly dovish,
Enright said the Canadian dollar could get a boost when some of
Canadaâ€™s surging commodity companies report quarterly results later in
Enright also said any signs of economic improvement in the U.S. will
benefit the loonie. â€śCanada has traded at a bit of a discount â€¦ Risk
aversion seems to have dropped, if the market gets some good news from
the U.S. it could really take the Canadian dollar stronger.â€ť
Not only will market watchers be waiting for the Bank of Canada
decision at 9 a.m. EDT, they will be waiting to hear if Canadaâ€™s big
banks cut lending rates in tandem. Hank Cunningham, director of fixed
income at Blackmont Capital, said any reluctance from commercial banks
would set up a major showdown.
â€śWhatâ€™s going to be very important tomorrow is whether the commercial
banks follow suit. Thatâ€™s going to be the key,â€ť Cunningham said.
â€śBecause if they donâ€™t cut mortgage rates and lending rates then whatâ€™s
did the Bank of Canada accomplish?â€ť
There have been reports that commercial banks may not follow the
central bank because the credit crunch has led to higher intrabank
lending rates. Typically, Canadian banks will announce a cut in lending
rates several hours following a decision but at times, they have waited
until the following day.
Cunningham expects a 50 basis point cut but said there may be a higher
risk of 25 basis points than the market is pricing because credit
market pressures have eased in the past week.
â€śThe Bank of Canada has been known to surprise in the past, so weâ€™ll see,â€ť Cunningham said.
By Adam Button, [email protected], edited by Cristina Markham, [email protected]
(END) Â©CEP Newswires - Â©CEP News Ltd. 2008. All Rights Reserved. www.economicnews.ca
Related recent stories: (08:15 04/22) CA Preview: Most Economists Expect 50 Point Cut to BOC Rate (Repeat) (07:36 04/22) Tuesday's Events: BOC Interest Rate Decision, U.S. Existing Home Sales (18:02 04/21) Market Preview: Loonie and CGBs Unlikely to See Big Moves if BOC Cuts 50 bps
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