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Wednesday, January 21, 2015 3:06 PM

Canadian Recession Coming Up: Yield Curve Inverts Following Unexpected Rate Cut; Loonie at Six-Year Low

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Currency wars pick up steam today with still more unexpected central bank actions. Please consider Canadian Central Bank Unexpectedly Lowers Interest Rates.

Canada’s dollar sank the most in more than three years after the central bank unexpectedly cut interest rates, saying crude oil’s collapse will slow inflation and weigh on the economy.

The currency reached the weakest level in almost six years after the Bank of Canada reduced economic forecasts and lowered the benchmark rate target to 0.75 percent, from 1 percent, where it’s been since 2010. Government bonds climbed, pushing yields on two-, 10- and 30-year debt to record lows. Crude, Canada’s biggest export, has tumbled more than 50 percent since June amid a global glut.

“They are taking pre-emptive steps,” Thomas Costerg, an economist at Standard Chartered Bank, said in a phone interview from New York. “If oil prices remain under pressure, you could potentially see further cuts. This was not expected, and it’s going to put pressure on the loonie.”
Preemptive Steps

How much more preemption before the derivative bubble blows sky high? On that question we find out more tomorrow.

US Dollar vs. Canadian Dollar

click on chart for sharper image

Since mid-2011 the "loonie" has lost about 24% vs. the US dollar. However, the dollar is a lot weaker than its Canadian counterpart compared to late 2001.

Canadian Yield Curve Inverts
  • 30-year: 2.044% (Today's Low 1.998%)
  • 10-Year: 1.426% (Today's Low 1.366%)
  • 05-Year: 0.791% (Down 19 basis points, an 18% decline)
  • 03-Year: 0.590% (Down 27 basis points, a 31% decline)
  • 02-Year: 0.560% (Down 29 basis points, a 34% decline)
  • 01-Year: 0.580% (Down 34 basis points, a 37% decline)
  • 01-Month: 0.640% (Down 22 basis points, a 26% decline)

Blue Ribbon Announcement

Canada wins the blue ribbon for the first G-7 yield curve inversion since central bankers started unleashing competitive "preemptive" rate cuts.

Yield on the Canadian 1-year note, 2year-note, and 3-year note are all inverted (lower than yield on the 1-month note).

In addition, yield on on the 1-year note is inverted with the 2- and 3-year notes.

I smell a Canadian recession (and more surprise actions). A bust of the Canadian real estate bubble, one of the biggest in the world, is also on the way.

Mike "Mish" Shedlock

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