Bank of Canada surprised the currency market by taking its overnight interest rate to a mere 25bp becoming the second lowest yielding currency in the G10 universe matching the rates of US and Switzerland.

Japan’s wholesale prices fell at the fastest pace in almost seven years. The Domestic Corporate Goods Price Index slumped by -2.2% on a year over year basis as industrial output contracted by double digit rates. The Bank of Japan’s overseas commodity index, which tracks changes in the cost of oil, steel, copper and wheat, slid 49.3% in March.

Over the past week, the Australian dollar staged an impressive rally as upside surprises in economic data fueled expectations that interest rates will be left unchanged for the second time in a row. Since March 10th, the Australian dollar has appreciated from a low of 0.6340 to an intraday high of 0.7228 on Friday. The Reserve Bank of Australia has a monetary policy meeting on Monday evening NY time, Tuesday morning in Sydney and the outcome of the meeting will determine whether the Australian dollar is able to sustain its gains. Currently, the market expects the RBA to leave interest rates unchanged, but some people believe that the RBA could cut rates by as much as 50bp, which means the upcoming rate decision, could be a close one. Although, leaving interest rates unchanged has become a common practice of many central banks these days, what sets Australia apart is that interest rates are not at zero, leaving the RBA with room to ease. At 3.25 percent, the country currently has the highest interest rate amongst developed countries.

The start of the week revived the carry trade in the currency market with Aussie hitting the 70 cent mark for the first time since January 10th of this year as equity markets in Asia and Europe opened on a positive note. The stealth rally in commodities which saw oil prices hit $52/bbl in overnight trade while gold rose to $957/oz also helped contribute to AUD/USD strength.

The minutes from the latest Reserve Bank of Australia policy meeting suggested that further rate cuts may be coming. Although RBA board noted that “monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect,” the Australian monetary officials noted that the economic benefits from the massive rate cuts “remained unclear”.

The minutes of the Monetary Policy Committee meeting revealed that the Bank of England voted unanimously to support quantitative easing as authorities attempt to employ every policy tool at their disposal to stimulate the moribund UK economy. The MPC also voted 8-1 to lower rates by 50bp with David Blanchflower once again reaffirming his dovish stance by opting for a 100bp cut.

Bank of England dropped the benchmark UK interest rate to 1.5% easing by 50bp as expected. The Monetary Policy Committee noted that the sharp drop in the pound provided additional stimulus to the UK economy tempering the need for more drastic rate cuts at the present time. The Central Bank acknowledged the severity of the UK recession stating that business and consumer confidence have declines markedly while noting that output is likely to drop sharply in the first half of 2009.