Morning Commentary: Cliff’s Edge

Foreign Exchange - Morning Commentary
Cliff’s Edge
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Heading into 2020, one of the key views for USDCAD was for the Bank of Canada to keep pace with the Fed as both central banks continued to normalize rates.  As it turns out, the two central bank have been moving together, but the synchronized move has been to deliver rate cuts instead of rate hikes.  To this point, the BoC just delivered an unscheduled 50 bps cut this morning, bringing its overnight rate to the effective lower bound.    

As with other banks that have delivered emergency cuts, the BoC’s actions were taken to provide support to the Canadian financial system and the economy during the COVID-19 pandemic.  As would be expected, the fall in growth expectations begets a fall in commodity prices which begets the underperformance of commodity-linked currencies. 

For the Canadian dollar, the fall in oil prices is of specific concern.  As an oil exporting country, the steep fall in oil prices has negatively impacted the economy with this negative impact from falling oil prices in danger of shifting to a non-linear one. 

Should oil prices continue to drop and remain below the break-even level, the Canadian macro economy will be hit exponentially by a pullback in oil producing operations and corporate/balance sheet stress spilling over into broader financial conditions.  For a real world example, one only has to look back to 2019 where low oil prices forced the Alberta government to mandate production shutdowns, leading to negative GDP growth.  Given the current situation, there is no reason why a similar thing can’t happen again especially in light of Canada’s basic balance (current account and capital account) deficit.    
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The U.S. (85.6K) has surpassed China (81.3K) for the country with the most confirmed coronavirus cases.  Of the U.S.’s 85.6K cases, New York alone accounts for 39K cases. 
  • The U.S. House of Representatives is expected to vote on the U.S.’ fiscal stimulus package today. 
  • UK PM Boris Johnson has tested positive for the coronavirus. 
  • The Reserve Bank of India delivered an unscheduled rate cut last night, cutting its repo rate by 90 bps to 4.0%.  Additionally, it took steps to add liquidity to the system by cutting the cash reserve ratio.
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