Central banks open financial taps

OTTAWA - The Canadian dollar and stock markets on both sides of the Canada-U.S. border rebounded somewhat Wednesday with the announcement of a co-ordinated strategy by North American and European central banks to inject billions of dollars of liquidity into financial markets to ease the global credit crunch.

"This is the biggest act of global economic co-operation since Sept. 11," said BMO Capital Markets chief economist Sherry Cooper, noting the action followed the U.S. Federal Reserve's failure to allay recession concerns with this week's quarter-point rate cut.

"These actions will help to alleviate the credit squeeze," she said.

Markets seemed to agree. Bay Street's benchmark S&P/TSX Composite Index gained about 85 points and Wall Street's bluechip Dow Jones Industrial Average just over 40 points higher.

John Johnston, chief strategist with RBC's The Harbour Group, noted that the action by the central banks is just the latest in a series of steps they have taken to deal with the global credit squeeze.

"In total, these actions are quite significant and pave the way for a much better end to 2008 than we are seeing to 2007," Johnston said.

The loonie and Canadian stocks got a bit of an extra boost from news of a stronger-than-expected trade surplus.

"Canadians shopped till they dropped for ever-cheaper imports in October and managed to spend less while buying more," CIBC World Markets economist Avery Shenfeld said after Statistics Canada reported the country posted a $3.3-billion trade surplus in October, which not only was more than expected, but was also up from an upwardly revised $2.8 billion in September.

However, analysts warned that trade will still be a drag on overall economic growth this quarter, as it was in the summer quarter. "It appears as if the Canadian dollar has left a big, ugly footprint on the international trade data," said TD Securities economist Jacqui Douglas, noting that thanks to the strength of the currency, spending on imports continues while exports struggle.

Imports fell two per cent to $34 billion, while exports edged down 0.5 per cent to $37.4 billion. But once the impact of prices is stripped out, the volume of imports rose 2.7 per cent, outpacing the 1.9-per-cent gain in exports.

Still, the trade surplus was surprisingly resilient in October even as the loonie rose to new highs, said BMO Capital Markets economist Benjamin Reitzes.

The co-ordinated response of central banks was to deal with the credit crunch resulting from the recession in the U.S. housing market and its spillover to the $300 billion in asset-backed commercial paper, including $35 billion in Canada, which has been tainted with holdings of U.S. subprime mortgages.

The Bank of Canada, in announcing its role in the effort, said it would expand the list of securities that it would accept in exchange for cash injections into credit markets, "offsetting the anticipated seasonal increase in the demand for bank notes," the bank said.

The bank announced it will buy $2 billion of securities today and sell them back on Jan. 10, and then another $1 billion at least will be purchased Dec. 18 and sold back on Jan. 4. It also announced a longer-term measure to provide support for high-quality types of asset-backed commercial paper.

The Fed also announced measures -- co-ordinated with the Bank of Canada, Bank of England, European Central Bank and Swiss National Bank -- to allow for injections of cash into the international financial system.