Last week there was Swiss surprise. This week there is a Canadian surprise when the Bank Of Canada surprised the currency market with a rate cut. This sudden rate cut sent USDCAD soaring up by almost 400 pips in just 2 hours.
The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.
Commodity currencies may face a race to the bottom as the Bank of Canada’s surprise rate cut sent the Canadian dollar to five-year lows and could pressure Australia’s central bank to follow suit.
“The reason [the Bank of Canada] cut rates is largely weaker oil prices. Australia is also a commodity exporter. The market could be excused for anticipating the RBA (Reserve Bank of Australia) would adopt a similar viewpoint,” said Greg Gibbs, senior foreign-exchange strategist at RBS.
Financial markets work on expectations. So a strong expectation has developed in the currency market that will put a lot of pressure on the downside on the Australian Dollar AUD. You can expect AUDUSD strong downtrend to start even before the RBA decision to cut the rate.
The surprises coming out of the Swiss National Bank, the European Central Bank, the Bank of England and the Bank of Canada spell tectonic shifts occurring in the global economy that inevitably will hit these shores.
You can call this a year of surprises by the Central Banks. Central Banks are the most important players in the currency market. Forget big bank manipulations. It just fades away in front of the Central Banks. When a central bank wants, it can move the currency market like no one else. The biggest surprise so far has been the Swiss Surprise that made EURCHF fall 2,297 pips in just a few minutes. USDCHF followed suit by falling 1,867 pips in just a few minutes.
As a currency trader, you should keep an keen eye on what the Central Banks do. If you trade EURUSD watch out today there is a very important ECB Press Conference in which ECB will announce the start of its bond purchase program that can push EURUSD to record new lows.
If oil prices keep on falling, expect the commodity currencies like CAD and AUD to race to the bottom.