Taking advantage of the recent surge in the Canadian dollar, the Bank of Canada cut its overnight lending rate by 25 basis points to 4.75%, the same as the fed funds target.
The Bank of Canada cut interest rates by 25 basis points
last month to complete the unwinding of last year's 100-basis-point hike, which took place during the global financial crisis that undermined the Canadian economy and the Canadian dollar.
Canada's economy is expanding but not at a spectacular rate. GDP expanded for seven consecutive months through February. Yet the 0.1% rise in February was below consensus expectations. Meanwhile, Canadian inflation is just within the lower end of the official target range of 1%-3%.
Today's quarter-point cut should be understood within the context of the strength of the Canadian dollar. The Canadian dollar has appreciated by almost 6% against the U.S. dollar since the middle of March. The currency appreciation is tantamount to some degree of monetary tightening. The Canadian dollar slipped a touch on news of the rate cut, but the dip is minor and reflects only a partial retracement of yesterday's strong gains.
This does not appear to be the end of the Canadian interest rate cycle and further cuts of 25-50 basis points are likely over the next quarter or two. The September Banker Acceptance futures contract has rallied in response to today's move and has gone a long way toward factoring in another 25-basis-point cut. Canadian interest rates from the two-year bond through the 30-year bond are below similar U.S. interest rates. It seems that overnight rates will go the same way, with Canada's call rate likely to dip below similar U.S. rates.
Today's rate cut does steal some of the thunder from Bank of Canada Governor Gordon Thiessen's speech later today.
Marc Chandler is an independent global markets strategist who writes daily for TheStreet.com. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at