This past week, the BoC delivered a 50 bps rate cut outside of its normal meeting schedule. In addition, the bank will also offer a commercial paper facility as well as an asset purchase program (QE) for the first time in the bank’s history.
Under normal circumstances, such actions would be a surprise to the markets but we aren’t living during ordinary times, resulting in a fairly muted FX reaction. Ultimately, it appears that the markets were anticipating this catch up move by the BoC to join most of the G10 at the zero lower bound. Within the G10, the Fed, ECB, BoE, Riksbank, RBA, RBNZ and BoJ are other central banks also running QE programs.
Looking specifically at Canada, the country finds itself in a vulnerable position. Not only is Canada a services led economy, which is currently in lockdown, it also is dependent on the oil sector. This makes for a concerning combination as oil prices have fallen to the point where major producers have started to shut down operations, hitting both oil production and the labor market.
It is notable that USDCAD is an underperformer in the G10 space this last week despite the market’s risk on narrative. This underperformance is even starker on an individual basis with the Canadian dollar significantly underperforming the Norwegian krone, another G10 petrocurrency. As such, it appears that the market’s bearish view on the Canadian economy’s vulnerabilities are being reflected in the price action.
Risk sentiment and the euro both got a boost last week from the Fed’s unlimited QE announcement, fiscal stimulus from the US and signs of coordinated action in the EU. Given this, Europe remains one of the hardest hit areas by the virus and the number of US cases has just surpassed those of China, meaning the risk backdrop remains fragile. Quarter end should see decent USD demand. Additionally, when the US introduced QE in 2008 and expanded it in 2009, the USD initially weakened but ultimately strengthened. Bias remains for the euro to move lower.
The GBP moved up on the week but the bias still remains bearish. Covid-19 fears continue to pressure global assets and Europe has been hit hard. Moreover, rate cuts from the Bank of England have exacerbated the UK’s large current account deficit that is not compatible with its low yielding status. EU-UK trade talks have been suspended for now and an extension is likely, however the reality remains stark with both sides still far apart and the probability for a hard Brexit outcome not immaterial.
Market risk sentiment received a positive bump last week, but I still think material headwinds remain. The US has yet to reach peak infection and clarity around the ultimate economic impact remains elusive. As such, safe haven demand is expected to remain persistent. Keep an eye on Japanese investor demand for foreign risk assets, which has been a key factor dislocating USDJPY from levels implied by yield differentials. With Japanese long-term yields expected to persist below zero, investor outflows should continue and provide a counterweight to safe haven demand.
The loonie recovered a bit last week on monetary and fiscal stimulus news, but as indicated in past write ups, additional headwinds are still to come. The BoC delivered a 50 bps emergency cut at the end of last week, bringing its rate down to the zero lower bound. Looking forward, expect USDCAD to consolidate with a bias for further Canadian Weakness.
Reports continue to point to a normalization of economic activity in China. However, the virus continues to spread in other parts of Asia, Europe and North America meaning global growth remains in a precarious position. Near term, expect currency stability as this is what the PBoC aims to achieve. Longer term, additional fiscal and monetary policy levers and head start on virus control argue for CNY outperformance.
Like other currencies, the AUD gained ground this week on a bounce in risk sentiment, but it’s still too early to call a change in the overall picture. The RBA has stepped up with policy action to support the economy, but virus developments remain the overarching driver. Continue to expect COVID-19 headlines to drive price action as these headlines inform the extent to which global growth and commodity demand will fall.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
No major central bank meetings
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Pending Home Sales MoM
Expectations for a -1.8% decline
US ISM Manufacturing PMI
Expectations for a 46.0 print
US Nonfarm Jobs Report
Expectations for a -81K decline in jobs
Canadian January GDP MoM
Expectations for a 0.2% increase
EZ CPI MoM
Expectations for a 0.6% increase
EZ Manufacturing PMI
Expectations for a 44.6 print
EZ Unemployment Rate
Expectations for a 7.4% print
EZ Services PMI
Expectations for a 28.2 print
Asia/Japan, and New Zealand
Chinese Manufacturing and Non-manufacturing PMI
Expectations for a 45.0 and 42.0 print, respectively
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