The Morning Commentary: Standing Firm But Ready To Act

Foreign Exchange - Morning Commentary
Standing Firm But Ready To Act
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Bank of Canada (BoC) will announce its next rate decision tomorrow morning and should keep its cash rate steady at 0.15%.  Previously, the BoC has acted quickly and decisively to bring its overnight rate down to the effective lower bound and implement other measures to support the economy. 

While no action is expected on rates, the BoC will publish a new outlook, inflation forecasts and its estimate of the neutral rate.  Given the magnitude of the BoC’s prior actions, expect them to keep rates unchanged for the foreseeable future while signaling the willingness to act further if needed.  With apparent opposition against negative rates, expect the next big step, should one be needed, to be yield curve control. 

Recent price action has seen the Canadian dollar strengthen, but we would be inclined to fade this global risk rally induced retracement.  A weaker loonie is needed help the Canadian economy adjust to the negative demand shock.  None other than the BoC itself has stated that the value of the Canadian dollar should ultimately reflect the sharp decline in commodity prices.  On a YTD basis, crude oil is down 65% while USDCAD is ~7% higher. 

On a historical basis, lower oil prices usually leads to BoC to run a looser monetary policy than the Fed.  However, due to the effective lower bound, there is little that the BoC can do on rates.  As such, expect USDCAD to continue to adjust higher to ease relative monetary conditions as well as to account for negative economic shocks from COVID-19 that are not likely be temporary. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • The International Monetary Fund has published its World Economic Outlook and predicts that the “Great Lockdown” recession will be the steepest decline in almost a century and flags risks around the recovery should the virus linger or return. 
  • Divergent virus outcomes continue to lead to a dichotomy of reactions.  Italy and Spain appear to be over the worst and are on track for a gradual re-opening with the US also pushing for the same.  Conversely, France, the UK, Japan and India are among the group of countries looking to extend or impose stricter lockdown measures. 
  • South Africa’s central bank cut its rates by 100 basis points to an all-time low of 4.25% in an unscheduled meeting.  This move comes right after the government announced an extension to its lockdown.  With no material fiscal response, the burden falls on monetary policy to support the fragile economy.  The ZAR is the worst performing EM currency on a YTD basis.
  • China’s trade figures came in better than expected.  Exports fell -6.6% against expectations for a -13.9% decline and imports fell -0.9% against expectations for a -9.8% decline.  While these numbers are positive and support the narrative that activity is recovering in China, uncertainty around the recovery is still high.  
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