Foreign Currency Exchange

The BoC left interest rates on hold last week at 3% but two factors that could weigh on the Canadian economy would be further deterioration in the US economy and the fact that growth in Canada was less than expected in July. We have also seen metal and oil prices continue to weaken which has weighed on the Loonie. However, finance minister Jim Flaherty has said that the strong labour market in Canada should help the country through difficult times that may be ahead.

Comments from the BoC following their meeting last week were slightly less dovish than expected and should rule out the chance of a further rate cut soon but if the economy continues to weaken there is still the slight possibility of further monetary easing before the year end. The difference between the UK and Canada is that the Bank of England are trying to combat what seems like an imminent recession with high inflation and are not yet in a position to cut rates to stimulate growth, whereas the BoC have relatively low core inflation and are therefore ready to cut rates when they need to if growth slows further. With this in mind we expect the recent Loonie strength against the Pound to remain for the time being as rate cuts in the UK look more likely as we move towards 2009, but could see some volatile trading if both central banks looking at cutting rates around the same time over the next few months.