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CAD Soars After Rate Announcement, Stakes are High for EU Leaders

Last updated 12/6/2011 9:24 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

Central banks around the world are ready and willing to do whatever it takes to protect their own economies from the uncertainty in Europe and the slowdown in global growth.   It is clear that everyone from foreign central banks to rating agencies are fed up with waiting around for the Europeans to come up with a rescue plan and decided to take matters into their own hands. By placing Eurozone countries on credit watch negative and extending this warning to the EFSF, S&P is effectively telling investors that the failure of EU Leaders to make substantial progress this week could prompt a wave of downgrades across the region. In anticipation of more trouble ahead, the Reserve Bank of Australia cut interest rates by 25bp last night to 4.25 percent.   Interestingly enough, the Bank of Canada wasn't nearly as concerned as the RBA due in part to slightly stronger than projected U.S. growth.   However Canada is in a unique position in that they are less exposed to Europe and China and more heavily reliant on the U.S.   The central banks of New Zealand, the Eurozone and the U.K. on the other hand are more exposed to the problems in Europe and Asia and will most likely share the cautionary views of the RBA.

Our colleague Boris Schlossberg wrote extensively about the RBA announcement, so we will spend our time talking about the Bank of Canada who left rates unchanged at 1.00 percent.   Their decision to hold rates steady was in line with the market's expectations but the central bank's tone was surprisingly optimistic.   With second half growth in Canada and the U.S. slightly strong than expected, the BoC did not share the same degree of pessimism as the Fed and other central banks.   They acknowledged that the troubles in Europe are more pronounced than anticipated which could have negative spillover effects on the U.S economy.   However with inflationary pressures slightly stronger than forecast, the BoC did not feel the need to grow more dovish and the fact that they did not even hint about the possibility of lower interest rates was enough to send the CAD sharply higher.

Meanwhile the focus remains on Europe. The warning from S&P makes the stakes for this week's EU Summit meeting abundantly clear.   If EU Leaders fail to make any meaningful progress, they will be putting their own credit rating and that of the EFSF at risk.   If the credit rating of any major European nation is downgraded, borrowing costs across the region will skyrocket, plunging Europe into a downward spiral that will affect risky assets across the globe.   This is a gamble that European leaders cannot afford to take.   With the stakes so high at this point, we hope to finally see decisive action at this week's Summit.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.