Season's Greetings to all and a warm Welcome to New Subscribers.

Well, we are close to ending another busy year in the world of real estate, especially with mortgage rates being at all time lows. It has been exciting for many people who have been able to become homeowners for the first time.

I wanted to share this article with you on the impact of the loonie has on interest rates.

Courtesy of Globe & Mail December 8, 2004

The Bank of Canada held interest rates steady Tuesday and some analysts now say it's only a matter of time before it has to shift gears again and start cutting borrowing costs to offset the damage wrought by a soaring loonie.

Tuesday's decision keeps the bank's key target for the overnight rate at 2.5 per cent. Its accompanying statement focused on the potential impact of exchange rates on Canada's economy.

"If exchange rates were to persist at current levels, and if all other economic and financial factors were to remain unchanged, there would be a dampening effect on aggregate demand for Canadian goods and services," the bank said, noting that the U.S. dollar has continued to fall against floating currencies, including the loonie.

The overnight target rate tells major financial institutions what the central bank wants them to charge each other on overnight loans. It is also the bank's main monetary policy tool for containing inflation and allowing consistent economic growth.

In making its latest decision, the bank also dropped its previous reference to the need to cut monetary stimulus further, instead saying that "a considerable amount of stimulus remains in the Canadian economy." Analysts said Tuesday that change marks a major shift in the bank's outlook and leaves the door open for it to start priming the market for rate cuts down the road.

"Our view is by the second half of next year, we would have to see the bank offsetting the damage of the currency, we would have to see at least a couple rate cuts," Scotia Capital Inc. strategist Andrew Pyle said.

In Tuesday's statement, he said, the bank noted that oil prices have fallen recently but also that global economic growth prospects have moderated, suggesting the bank's view of the world economy has shifted.

"I think those trends are probably disturbing the bank," Mr. Pyle said. "Here at home, we're dealing with the currency, and we're going to have our own economic problems as a result.

"But when the bank looks to countries like Germany and France and Italy that are also under extreme pressure because of their currencies, and sees negative trends developing, I think that has to be a double concern for the bank.

"In the past three months, the Canadian dollar has risen roughly 10 per cent against its U.S. counterpart. On Tuesday, the loonie fell in the wake of the announcement, dipping below 83 cents (U.S.) to 82.79 cents.

That movement, however, also came as the U.S. dollar continued to flag on world currency markets, again touching a record low against the euro, suggesting to some economists that the loonie's current lull could be short lived.

"We've seen a bit of consolidation, I think mainly because of the bank and the market's view that the bank may cut rates, but this has really been a one-way move for currencies, which is strange," Mr. Pyle said.

"We had thought that perhaps we would see a bit of a pause in the Canadian dollar, but eventually by the middle of next year, we would be up at 90 cents and that would be a trigger for the bank. But that could happen earlier. That could happen in the next few months.

"Until late last month, economists had been expecting the central bank - which raised rates twice already this fall - to hike again in its final fixed-date policy announcement of the year.

Late-November comments from Bank of Canada Governor David Dodge, however, on the potential negative impact of the rising Canadian dollar - the bank had previously suggested that solid economic fundamentals meant the currency's gains were "not inappropriate" - sparked a sudden shift in market sentiment, given readings on November employment and broader economic growth in the third quarter.

Following Tuesday's statement, Royal Bank of Canada assistant chief economist Derek Holt also said RBC doesn't expect to see any further action from the Bank of Canada on rates until the latter half of next year.

"The Bank of Canada bought some time this morning in order to properly assess the uncertain impact of many developments that have been concentrated upon the past few weeks," he said.

"Our revised forecast now calls for no changes in Canadian short-term interest rates until the second half of next year.

"The main reasons, he said, are recent disappointing economic reports in this country along with little indication that inflation is a threat and the impact of currency moves.

"Markets are increasingly cautious about the full implications of the Canadian dollar's steep appreciation against the U.S. dollar and the possibility that the U.S. currency may depreciate further," he said.

"Simply put, by running up external debt through the fiscal and current account deficits, the U.S. is selling more paper to the rest of the world at falling prices as foreign investors demand a growing risk premium through currency depreciation in order to be enticed to lend bigger amounts to the United States.

"The Bank of Canada's next rate decision is slated for Jan. 25.

The Federal Reserve, meanwhile, is scheduled to make its next decision on interest rates on Dec. 14. The Fed is expected to deliver its fifth rate increase of the year at that meeting.

Feel Free to call anytime…

Warm Wishes for the Holiday Season,

Dan Heon
ProLink Mortgage & Financial Corp.
Phone:   403-257-1801
Fax:   403-206-7622
Toll Free:    1-888-281-0111
Email: ProLink@telus.net

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