CAD Soars After Rate Announcement, Stakes are High for EU Leaders

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Central banks around the world are ready and willing to do whatever it takes to protect their own economies from the uncertainty in Europe and the slowdown in global growth. It is clear that everyone from foreign central banks to rating agencies are fed up with waiting around for the Europeans to come up with a rescue plan and decided to take matters into their own hands. By placing Eurozone countries on credit watch negative and extending this warning to the EFSF, S&P is effectively telling investors that the failure of EU Leaders to make substantial progress this week could prompt a wave of downgrades across the region. In anticipation of more trouble ahead, the Reserve Bank of Australia cut interest rates by 25bp last night to 4.25 percent. Interestingly enough, the Bank of Canada wasn't nearly as concerned as the RBA due in part to slightly stronger than projected U.S. growth. However Canada is in a unique position in that they are less exposed to Europe and China and more heavily reliant on the U.S. The central banks of New Zealand, the Eurozone and the U.K. on the other hand are more exposed to the problems in Europe and Asia and will most likely share the cautionary views of the RBA.

Our colleague Boris Schlossberg wrote extensively about the RBA announcement, so we will spend our time talking about the Bank of Canada who left rates unchanged at 1.00 percent. Their decision to hold rates steady was in line with the market's expectations but the central bank's tone was surprisingly optimistic. With second half growth in Canada and the U.S. slightly strong than expected, the BoC did not share the same degree of pessimism as the Fed and other central banks. They acknowledged that the troubles in Europe are more pronounced than anticipated which could have negative spillover effects on the U.S economy. However with inflationary pressures slightly stronger than forecast, the BoC did not feel the need to grow more dovish and the fact that they did not even hint about the possibility of lower interest rates was enough to send the CAD sharply higher.

Meanwhile the focus remains on Europe. The warning from S&P makes the stakes for this week's EU Summit meeting abundantly clear. If EU Leaders fail to make any meaningful progress, they will be putting their own credit rating and that of the EFSF at risk. If the credit rating of any major European nation is downgraded, borrowing costs across the region will skyrocket, plunging Europe into a downward spiral that will affect risky assets across the globe. This is a gamble that European leaders cannot afford to take. With the stakes so high at this point, we hope to finally see decisive action at this week's Summit.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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