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Daily Market Commentary

The absolute routing in the short end of the curve continues this morning.  Yesterday marked the biggest one day sell-off in the 2 year Treasury since 1996.

As there was no news yesterday to spark the selloff that started around noon, blame is being placed on Jean-Claude Trichet, governor of the ECB, and his hawkish comments from Friday, where he threatened to hike rates in the ECB to fight inflation.

The pain was felt in the short end of the curve as both treasuries and Canada bonds flattened dramatically and continue to do so today. 

We may have some changes to sentiment once Carney speaks this afternoon following the BoC rate decision.  We are widely expecting a 25 bp cut in rates, heralded by our weak GDP and tame inflation.  Will there be more?  With most of the world expressing their worries about inflation, we stand alone with the US with our downward bias to short rates.  The ECB, the BoA, the RBA, the RBNZ, India, China among many others are all openly worried about inflation.

We will be looking to lock in variable rate mortgages and shorten duration, particularly if there is a whiff of hawkishness from the Bank's statement.

 The US Trade Balance will also be out this morning (it seems a little outdated to call it a Trade Balance, but I digress), the average guesstimate is a shortfall of $60 billion.  It appears the trade deficit has bottomed out and sputtering around the neg $60 mark.  As the US$ weakens, imports will slow and we may even see a revival of the US export sector if it gets low enough.  Perhaps we are witnessing the early stages of a reversal in a 20 year trend.

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