Canadian dollars fall through the air in a photo illustration in Vancouver, B.C. Thursday, Sept. 22, 2011.JONATHAN HAYWARD
The Canadian dollar surged more than a full U.S. cent Wednesday after the Bank of Canada joined other major central banks to provide added support to a global financial system under severe strain from Europe's debt crisis.
The loonie jumped 1.26 cents to 98.32 cents (U.S.) after Canada's central bank announced it is joining the Bank of England, the Bank of Japan, the European Central Bank, the U.S. Federal Reserve and the Swiss National Bank "to enhance their capacity to provide liquidity support to the global financial system."
The central banks are making it cheaper for banks to get U.S. dollar liquidity when they need it, starting next Monday. They are also taking steps to ensure banks can get ready money in any currency if market conditions warrant.
The action by central banks comes at a time when the European debt crisis is worsening with bond markets demanding higher interest rates to buy bonds of heavily-indebted countries such as Italy.
"What they're trying to do is make a coordinated action to reassure markets that there is a centralized sort of central bank move to mitigate this crisis," said Emanuella Enenajor, senior economist at CIBC World Markets.
"I think the coordinated effect of the announcement is just as important as the actual content of the message itself."
The possibility that one or more European governments might default on debt have raised fears of a shock to the global financial system that would lead to severe losses for banks and a contraction in lending.
Fears of more financial turmoil in Europe have already left some European banks dependent on central bank loans to fund their daily operations. Other banks are wary of lending to them for fear of not getting paid back.
Traders also took in data showing that real gross domestic product in Canada grew at a better-than-expected annualized rate of 3.5 per cent in the third quarter after a second-quarter drop of 0.5. Economists had expected a reading of 3 per cent.
The energy sector led the way and notable increases also occurred in manufacturing, construction, wholesale trade and the transportation and warehousing sector.
Commodity prices also ran up smartly in the wake of the central bank announcement with the January crude contract on the New York Mercantile Exchange up $1.26 (U.S.) to $101.05 a barrel.
Metal prices also advanced sharply with the March copper contract ahead 22 cents (U.S.) to $3.61 a pound while the February gold contract was ahead $30.90 (U.S.) to $1,749.80 an ounce.
The reassurance from major central banks further enhanced positive sentiment arising from moves by China to ease lending and encourage growth.
China's central bank announced that the amount of money China's commercial lenders must hold in reserve will be cut by 0.5 per cent of their deposits, effective Dec. 5. It was the first easing of monetary policy in three years.
Lending has been tightened as Beijing dealt with unacceptably high levels for inflation, especially for food.
But analysts have expected China to loosen lending controls after inflation eased to 5.5 per cent in October from a three-year high and a surge in housing prices levelled off.
China has been a rare bright spot for the global economy since the financial crisis of 2008. Its strong growth has been particularly helpful for the resource heavy TSX as strong demand has boosted demand for commodities such as oil and metals.
The move by China to reduce bank reserve levels helped counter disappointment from Europe after the region's finance ministers failed to announce radical new measures to deal with the crippling debt crisis afflicting the 17-nation euro zone.
A decision on how to forge a closer fiscal union between the 17 euro zone countries will have to wait until the leaders' summit next week.