News & analysis


Yesterday saw the loonie slide 1.72% open to close as the US dollar firmed across the board, WTI slipped to its lowest level since 2002, and the Bank of Canada unveiled further loosening measures. Yesterday, Governor Stephen Poloz unveiled what is likely to be his last Monetary Policy Report, but this time the report came without forecasts due to the high degree of uncertainty around the state of the economy and the length of containment policies put in place. The bank did estimate that the contraction in growth is likely to be around 15-30% in Q2 relative to the rate of expansion in Q4 2019 and that the near-term downturn may be the sharpest on record. With spreads widening between provincial debt and corporate debt, and the overnight lending rate, the BoC thought it was apt to unveil further stimulus measures to improve the transmission of their 150bp cut last month to other markets. The C$50bn provincial bond purchase program and C$10bn corporate bond purchase program should do just that as the BoC attempts to ease credit conditions and bring down yields. The reference made to increasing federal and provincial debt issuance to finance the fiscal spending packages may have been a wink and a nudge to markets, suggesting the large scale asset purchases may be in place for some time and are likely to be expanded in the coming months. The departing governor also said that the selection process for his successor is 90% completed. Oil markets have stabilised somewhat after yesterday’s slide to new lows following the IEA report, which outlined some record breaking negative statistics for the oil market, after Bloomberg sources suggested that the US administration has plans to subsidise US shale producers who refrain from production. The move in crude is mild but WTI now sits just off of its multi-decade lows at $19.90. Today, the only data release scheduled is February’s manufacturing sales at 13:30 BST, while the ADP payroll data is released at the same time and is likely to be more interesting.


The dollar saw a burst of strength yesterday as crude oil prices collapsed and risk appetite deteriorated, and the dollar is up against most major currencies this morning, although the rate of its progress has slowed somewhat. The tightening in financial conditions and signs of stress in dollar funding markets that characterised the rapid dollar appreciation seen in March were nowhere to be seen, suggesting that the decline in crude oil prices has not triggered a wider panic. Donald Trump said that he would announce guidelines on re-opening the US economy today, claiming that the country has passed the peak of the coronavirus epidemic. The details of the re-opening, as well as the risk of a second wave of infections, carry a high potential for market volatility. Economic data yesterday highlighted the sheer abruptness and size of the coronavirus shock to the economy. Retail sales contracted 8.7% in March, while the Empire State Manufacturing Index fell from -21.5 to -78.2. The index’s low in 2008 was -34.2. Industrial production data were similarly grim, with March industrial production falling 5.4%, and manufacturing falling 6.3%, compared to the 3.5% drops seen in late 2008. Industrial production data are the timeliest “hard” output data available in the US, and taken with the afternoon’s other releases, point towards an unprecedented collapse in the economy. This point was underlined by the release of the Fed’s Beige Book report, which showed falling demand across almost the whole economy, which was contracting “sharply and abruptly”. The tide of poor data will continue this afternoon, with Initial Jobless Claims due for release at 13:30 BST. The median forecast submitted to Bloomberg is for 5.5 million new claims, and 13m existing claims – if these forecasts are exceeded, the US economy will have undone the entire net increase in employment since the financial crisis. Building permits, housing starts, and the Philly Fed Manufacturing Index will be released at the same time.


The euro was struggling to resist further depreciation against the greenback this morning as a plunge in crude prices and renewed risk aversion in markets continues to boost the US dollar. In normal times, falling crude prices may not be a good sign for the greenback, but the reserve currency’s haven characteristics made for another swathe of strength in the dollar. In terms of new virus cases, countries throughout the eurozone are tallying their lowest numbers in weeks. German Chancellor Angela Merkel announced that some smaller shops will be reopened next week and schools will gradually restart in early May. In France however, daily fatalities rose to a record high. Final German consumer price indices showed no change from the prior reading and estimated value and printed 0.1% month-on-month and 1.4% year-on-year, while the harmonised MoM and YoY CPIs printed 0.1% and 1.3% respectively.  Eurozone industrial production that is due at 10:00 BST will provide morning data interest ahead of US jobless claims this afternoon. The industrial production data release may support the narrative offered by the eurozone’s better-than-expected PMI data from a couple of weeks ago. The PMIs were subject to noise from the inverse effect of the supply delivery times, which made it seem like an increase in delivery times meant that production was reaching its maximum capacity. In reality, a disruption in supply chains is more likely to have caused the increase in delivery times. If the industrial production data surprises to the downside, this highlights the inverse effect from the supply delivery times, while better-than-expected data could indicate that the PMIs were less disturbed by noise.


Sterling’s new status as a high beta currency saw it join the risk-off session and fall some 0.88% against the dollar yesterday. The pound is continuing to depreciate in today’s session as investors flock back to the dollar over concerns about the global economy, while the UK is expected to announce an extension to its lockdown today and the Bank of England’s Tenreyro is set to speak at 14:30 BST. This morning, the IMF issued a stark warning to the UK and European Union, stating that trade talks should be extended past December 31st. The IMF said it would be “wise not to add more” to the uncertainty that the coronavirus has caused for both businesses and citizens. The IMF Managing Director said “it’s tough as it is, let’s not make it any tougher”. The headlines come as authorities on both sides of the table have reiterated their intent to maintain the December 31st deadline this week, which may further add to the pressure sitting on top of the pound.



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