Blog by Mehrnaz Chitsaz

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From today's Custom House Newsletter, as expected, Prime lowered .50% to 4.75% - no word on fixed rates following, as yet. 

Canadian Dollar Down With Interest Rate Cut 

The bank of Canada delivered a 50 basis point interest rate cut this morning to take the Bank’s overnight lending rate to 3.0%. In it’s accompanying statement, the Bank maintained an easing bias, suggesting further rate cuts may be necessary given the depth of the economic slowdown in the US. The Bank did, however, suggest that the timing of future rate cuts would be dependent on a number of economic variables including global economic growth and domestic inflation, thereby downplaying expectations that further cuts should be considered imminent. Either way, the fact that the Bank is maintaining an easing bias, has caused the Canadian dollar to sell-off sharply against the US dollar and most other currencies. The loonie has slipped below 99 cents against the US dollar and is now trading down 60 basis points on the day at .9880 and showing signs that it wants to trade even lower.

Against other currencies, the Canadian dollar is giving up even more ground and is trading at multi-month lows against the euro, and Australian and New Zealand dollars, all currencies providing much higher yields than the Canadian dollar. With the Bank of Canada indicating that Canadian interest rates are likely to go lower before they go higher, the wide interest differential between Canada and some of the other countries sets up the dollar to be used as a carry trade funding currency, and this is likely to add to the dollar’s woes over the coming months. For instance, traders can buy the Australian dollar forward against the Canadian dollar and pick up a 4.70% yield advantage. So long as the yield differential does not narrow, shorting CAD against AUD is an attractive trade and the Canadian dollar has lost 13% of its value relative to the Australian dollar since the beginning of the year. Against the US dollar, trade matters to the Canadian dollar and the price of oil is dollar supportive. But against other currencies like the Australian dollar and the euro, interest rate differentials are more important, and falling Canadian interest rates have caused the Canadian dollar to be the worst performing of the major currencies over the past four months. Today’s monetary policy announcement by the Bank of Canada suggests that the Canadian dollar likely has further downside ahead, particularly against the Australian dollar. 

From my last note...A reminder that 5.35% for a 5-year fixed is available on a quick closing. Adjustable Rate Mortgages (ARM's) are still the most popular product today as the declining rate market is conducive to keeping your option open and snagging the lowest rate possible (if you are a "fixed rate" personality type).  Variable products with deep teaser rates can give you a 6-month initial rate of 2.90% - the down side is the remainder of the term is at Prime minus .25%, but these products are for those who actually prefer a fixed rate and want the option of starting in an ARM while rates continue to drift down, and the teaser up front is a major bonus - what incredible savings!  The upshot is, don't lock in at today's rate!  And if you are blending with an old rate on a refinance make sure you have run the numbers and are certain you're doing what's in your best interest!  If an ARM is what you prefer, your patience has paid off!

Best regards,

Kathie Scott, AMP
The Gibbard Group of INVIS
Cell - 604-813-4543
Fax - 604-648-9974


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