Financial Update

Bank of Canada Cuts Rate by 50 Basis Points as Economy Slows

April 22 (Bloomberg) -- The Bank of Canada lowered its benchmark rate by half a point to revive an economy that's growing at its slowest pace in 16 years and signaled more easing may be needed. The rate on overnight loans <http://www.bloomberg.com/apps/quote?ticker=CABROVER%3AIND> between commercial banks dropped to 3 percent, the lowest since December 2005, as forecast by 28 of 32 economists in a Bloomberg survey.

· TSX continued to climb for the 6th day in a row +84.10

· Dow -24.34.

· Dollar -.11c to $ $99.40US

· Oil +$.79 continuing to break new records $117.48US per barrel

· Gold +$2.50US to $914.70US

Bond Rates: http://www.bankofcanada.ca/en/rates/bonds.html <http://www.bankofcanada.ca/en/rates/bonds.html>


Below is an informative piece from Saturdays National Post on what will happen to interest rates after both the Bank of Canada and the US Fed drop their predicted .50% on the overnight lending rate, broken down by fundamental, season and technical influences.


U.S. rates likely to bottom in spring

Comment; That will be good for the U.S. dollar but bad for bonds Don Vialoux, Financial Post

Central bank interest-rate changes will be a focus for investors during the next two weeks. The Bank of Canada is expected to preempt the Federal Reserve by reducing its overnight lending rate next Tuesday by another 0.5%. The Federal Reserve is expected to reduce the Fed Fund rate by 0.5% to 1.75% on April 30. What will happen to interest rates after these changes?

Fundamental influences

The Federal Reserve has been caught in a difficult position since last August. It had to battle against a virtual collapse in confidence in credit markets. In addition, it wanted to protect the U.S economy against inflationary pressures as well as defend the U.S. dollar.

The Fed chose to battle the confidence crisis in credit markets first. In so doing, it allowed the U.S. dollar index to fall 17% and watched while the inflation rate rose to 4.0%. The Fed Fund rate, at 2.25%, already is at a significant discount to the U.S. inflation rate and is generating negative returns after inflation throughout the U.S. yield curve.

Evidence of a recovery in confidence in credit markets appeared last week. Several U.S. banks announced substantial declines in quarterly earnings as well as major writedowns related to the credit crisis. Investors are guessing that the worst of the writedowns are over. Most stocks in the sector rallied on the news.

The Federal Reserve is expected to move to its next objectives after April 30. Inflation concerns and weakness in the U.S. dollar will be addressed. Traders will watch closely for guidance.

The best guess is that the Federal Reserve will halt reducing the Fed Fund rate at its April 30 meeting and will start to raise the Fed Fund rate as early as its June meeting.

Technical influences

Early technical signs of a recovery in long-term interest rates have appeared. An 11-month downtrend in U.S. 10-year treasury yields recently bottomed by establishing a range between 3.28% and 3.96%.

A tighter trading range between 3.28% and 3.62% evolved during the past month. Late last week, the tighter trading range was broken on the upside. In addition, yield moved above its 50-day moving average, and its 11-month downtrend was broken on the upside. The technical pattern on 10-year Government of Canada bond yields is similar. A breakout occurred last week when yield moved above 3.60%.

Seasonal influences

According to Thackray's 2007 Investor's Calendar, the yield on U.S. 10-year treasuries has a history of rising at this time of year. The period of strength is from April 16 to May 9. Yields have increased in 30 of the past 40 periods since 1967.

This annual event is tied to payment of U.S. taxes on or just before April 15. Taxpayers liquidate short-term money-market instruments and deposits to pay their taxes.

Brooke Thackray notes that, "after paying taxes, there is not a lot of money floating in the system, pushing up the price of money (raising interest rates), and pushing down the price of bonds."

Impact

A bottoming of long-term interest rates has important implications on a variety of markets including: the U.S. dollar (bullish); U.S. bond prices (bearish); financial service stocks (bullish as interest rate spreads widen); commodities (bearish). - Don Vialoux, chartered market technician, is the author of a free daily report on equity markets, sectors, commodities, equities and exchange-traded funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux does not own U.S. or Canadian 10-year bonds mentioned in this report.

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