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Preview – Bank of Canada Interest Rate Announcement
The Bank of Canada is expected to keep interest rates unchanged at 4.25% when it announces its decision at 1300 GMT on 29-May-2007. It has kept interest rates at this level since May last year, when it had hiked rates by 25Bps. This is the fourth time it is meeting in this year, out of the total eight times, which it meets in any given year. The Bank is, however, expected to maintain a hawkish bias on inflation in the speech which accompanies the decision, as there has been a rapid hike in the Canadian CPI recently. Canadian inflation has been running in the upper half of the target zone of inflation of 1% and 3%. (See first chart below) The BOC Core Inflation in the month of April (Y/Y) had come in at 2.5%, up from 2.3% in March. What is of importance is that the Core Inflation index has remained above the 2.00% mark every month since July 2006. The Bank is also likely to note that since there has been a rapid increase in the CAD recently, the import prices could fall, helping in moderating inflation. The Canadian Dollar Libor has started to move up once again, particularly near the Far end of the curve, as the markets have started to bet that the next move in the interest rates in Canada will be a hike, as opposed to a rate cut, which was previously being thought of. This perception, of course, could again change if the inflation starts to moderate going forward. The Canadian Bond Yields have also been increasing sharply recently as seen from the second chart given below. They are currently at their highest levels since Q4-2006. The 10-Year Yield currently stands at 4.40%. The 2-Year Yield is at 4.43%. The 10-Year Yield has plenty of room to further move up from the current levels. [I]Technically[/I], the [B]USD-CAD[/B] has been in a freefall since breaking down from 1.1700 in the third week of March. In this fall, the pair has now moved on to a new 29-year low. At the moment the trend is just too strong to be thinking of taking any contra trades, and it certainly looks like that the trend would continue for some more time, possibly towards 1.0600 in the next couple of weeks. The bearish bias on the USD-CAD stays as of now. See BOC Libor and BOC Interest Rate Chart at [URL]http://www.kshitij.com/utilities/funcharts/caboc.shtml[/URL] Trade Wise, Trade Well!
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