Canada Joins Monetary Easing Parade
Today’s Spotlight Market
The Bank of Canada?s move to lower the country?s key benchmark rate caused some adjustments in rates on long-term government debt. The yield on the 10-year Canadian bond fell to a low yield of 1.365% following the rate announcement. Possibly more interesting for traders is the current yield differential between Canadian and U.S. 10-year rates. Here the U.S 10-year Notes have a positive yield differential of about 0.34% over the Canadian 10-year. This could spur further interest from Canadian investors into U.S. Treasuries given not only the positive yield differential, but also the potential benefit of a stronger U.S. Dollar that would allow Canadian holders to potentially receive more Canadian Dollars when they convert proceeds from U.S. Dollars given the current trend in favor of the greenback. ?
Fundamentals
Global Central Banks continue to surprise market participants. This time it was the Bank of Canada?s (BOC) turn, as the bank cut the overnight loan rate by 0.25 percent to 0.75 percent on Wednesday. The interest rate move was unexpected by most traders and may be a signal that the BOC is becoming very concerned about the state of the Canadian economy, especially given the current weakness in commodity prices and in particular Crude Oil. The BOC also lowered its economic growth forecasts for the first half of 2015 to 1.5% annualized rate due to economic headwinds tied to lower energy prices.
Canada remains particularly vulnerable to the movement in Oil prices as a large chunk of its economy, and in particular the province of Alberta, is tied to energy production. Any fallout from a cut-back in energy related projects could spell difficulty for Alberta?s employment picture, as well as its housing sector, where prices have been elevated due to tight supplies as workers migrated to the tar sands regions of the province to find higher paying energy jobs. Currency traders reacted quickly to the BOC interest rate cut by sending the Canadian Dollar futures down nearly 2- cents, which is a rather large one day move. With the Canadian Dollar now trading at nearly 6-year lows vs. the U.S. Dollar, it may take some time for the ?loonie? to fly higher.? ?
Technical Notes? -? View Today’s Chart
Looking at the weekly continuation chart for Canadian Dollar futures, we notice the really long-term trend is still higher based on the uptrend line drawn from the major lows formed back in early 2002. However, we do note that prices are currently attempting a 61.8% Fibonacci retracement of the bullish move that began with the 2002 lows that cumulated with the historic highs made in 2007. The 14-week RSI has moved to extremely oversold levels, with a current reading of 11.56. The next major support level is found at the 2009 low of 0.7653, with chart resistance seen at the July 2014 high of 0.9399.
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