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Daily Market Commentary

Canadian CPI showed further cooling on the inflation front, just what the BoC needed to see.  Core CPI was negative month over month, and the headline dropped to a mere 0.1%/  With Headline now running at 2.4% and Core at 1.5%, we are within the Bank's range, and the trend is down.  This will give them the green light to continue to cut rates as needed.

 

 

 Calm seems to be returning to the market.  The wild swing in the two year treasuries may have been the "capitulation" that everyone seems to be looking for as markets fall.  After hitting an intra-day high of 1.83% on Wednesday, they are back to 2.33% this morning.  The TED spread (included in the FI Snapshot) continues to normalize.  This is all despite HORRIBLE housing numbers coming out yesterday.  Existing home sales dropped 2.2% in December... but then we were all expecting that, weren't we?

 

  After the SocGen scandal, the press is now wondering whether the emergency 75 bp rate cut was necessary.  We would argue, that according to Fed funds futures and the Treasury markets, which are still pricing in the highest probability of a further 50bp cut at the scheduled meeting next week (just slightly higher probability than a 25 bps cut).  We would argue after giving the market a big bonus and finding out after the fact that much of the volatility was due to SocGen unwinding trades on an illiquid MLK day, the Fed will be more cautious on Wednesday.  25 bps is likely here.

 

 

As the calm returned, the CAD$ rocketed forward yesterday, posting big gains against virtually every currency that matters.  We had a cent and a half move against the greenback yesterday - a huge reversal of recent trends.  Once again, be long the CAD$ as long as the world is willing to take risk.  As go equities, so goes the loonie.

 

 



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