The Bank of Canada will cut rates another 50 basis points to just 0.50% in March, predict economists with Toronto-Dominion Bank.

In a research note, TD Economics observes that, “With rates already at historical lows, there is little further room to ease. As such, we forecast the Bank of Canada to deliver just one more 50 bps rate cut on March 3, lowering the overnight rate to 0.50%.”

The bank indicates that it is unlikely that rates will be cut further, “given the numerous technical problems it will create in money markets and some financial instruments linked to the overnight rate”.

“Monetary policy easing will push rates at the short end of the Canadian bond market lower. Looser fiscal policy means robust issuance in Canada which will likely meet with sufficient demand, allowing yields across the curve to follow suit,” it adds.

TD Economics also says that continued softness in commodity prices will remain a drag on the Canadian dollar in the near term, “though the prospect of U.S. dollar weakness as 2009 unfolds and a slow rebound in commodity prices could allow the loonie to appreciate modestly.”

In the United States, rates have already been lowered to a range of 0.00% to 0.25%, so there is obviously even less room to move there than there is in Canada. “Near term, with the fed funds rate unlikely to budge from the 0.00% — 0.25% range, and the Fed’s admission that it is willing to purchase longer dated Treasuries outright suggests a period where yields will be low and the curve will be flat, despite the substantial bond issuance,” TD says.

“And as global investors slowly regain their bearings, the safe haven bid is starting to come off the U.S. dollar. Moreover, with bleak economic fundamentals, investors are unlikely to find the dollar an attractive bet for quite some time. As such, we think the greenback will face a rather bearish environment in the coming quarters,” it concludes.

IE