Tuesday, January 20, 2009

Canada Heading For ZIRP

Canada reduces its short term interest rate to 1%, making it the lowest after the U.S., Japan and Switzerland. The Bank of Canada also hinted that it plans to cut more, pushing it closer to ZIRP (Zero Interest Rate Policy).

Canada has been hit hard recently by the slump in its main export market and by the decline in the price of oil and other commodities it exports. Because of that and the interest rate cuts from the Bank of Canada, the Canadian dollar is down nearly 30% against the USD since its peak in late 2007.

While the slump in exports will continue to weigh on the Canadian dollar and so push it even lower, it could soon reach its low. The global slump has so far benefited currencies where interest rates were low to begin with, which is to say the USD, the yen and the Swiss franc, as they have little room to fall further. That may soon start to benefit the Canadian dollar too.


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