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'There will be blood:' JPMorgan predicts Canadian dollar to sink to 77 cents if Bank of Canada cuts again

Canada has so far only witnessed the tip of the iceberg in terms of direct direct damage from the oil price collapse, warn analysts

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The Canadian dollar could fall as low as 77 cents U.S. if the Bank of Canada cuts rates again in March, says a leading U.S. bank.

JPMorgan sees a 75% chance the Bank will cut is benchmark rate at its next meeting, higher than the market’s bet of a 50% chance.

Canada has so far only witnessed the tip of the iceberg in terms of direct direct damage from the oil price collapse (especially regarding energy-sector capex and employment), said JPMorgan analysts Kevin Hebner and Niall O’Connor in the report. Canada’s Parliamentary Budget Officer has estimated that WTI trading at $48 through 2015 would reduce the federal budget balance by $5.3-billion. And the Bank of Canada also is concerned about other “financial stability risks” such as stretched household debt levels and the frothy housing market.

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“All together, particularly from a risk management perspective, this strongly suggests that last week’s move was not a “one and done” affair and that a second cut is highly likely,” the analysts said.

The only thing that might stop a rate cut would be a V-shaped recovery in oil prices soon, anevent the analysts view as highly unlikely. JPMorgan expects oil to average $41 this year.

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