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Wednesday, July 15, 2015

Bank Of Canada Cuts

In a not very surprising step, the Bank of Canada cut rates again. This probably the low in rates, as the money markets stopped functioning properly at a lower policy rate. Meanwhile, "quantitative easing" makes no sense in the Canadian context. (I described the Canadian monetary system in Understanding Government Finance, and the lack of bank reserves means that it operates somewhat differently than other systems, such as the United States.)

This could raise the animal spirits of Canadian realtors, but that will not last if people start losing their jobs. Economists have declared the Canadian "technical recession" as being "contained," but that is exactly what the consensus was in mid-2008 in the United States.

If Yellen remains hawkish, this could be fairly disastrous for the Canadian dollar (which is the whole point of the rate cut). The foreign exchange implications of a September Fed rate hike, given the uncertainty in Europe, are impressive. Janet Yellen could very well have her own "Trichet moment."

(c) Brian Romanchuk 2015

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