News & analysis


The loonie bounced back 0.36% against the dollar yesterday, reversing all of Wednesday’s losses along with some of Tuesday’s. Yesterday saw all six of Canada’s biggest banks pass severe stress testing by the Bank of Canada under its Financial System Review, which was devoted to the Covid-19 crisis. Generally, the central bank is confident that its response to the pandemic means an economic disaster has been averted, but Governor Poloz reiterated that the incoming recession will be short and sharp. The review suggested that the Bank’s researchers thought a credit crunch, stemming from the economic collapse and leading to financial market frictions, will be avoided. The central bank also estimated that around 20% of homeowners entered the downturn with enough cash and liquid assets to cover two months of loan payments, but the report highlighted that the major banks had sufficient capital and liquidity buffers to protect the financial system from a spike in defaults. On the data front, yesterday saw March’s manufacturing sales data contract 9.2% MoM – a much sharper contraction than expected with the median Bloomberg forecast sitting at -4.5%. Oil markets are helping the Canadian dollar find a firmer footing as WTI futures climb above $28 in this morning’s session. WTI is up about 14% on the week as China’s industrial output increased in April, signalling improving demand conditions, while supply cuts begin to take effect and even increase. With little on the data calendar for CAD today, eyes will be on crude as WTI approaches its April high of $29 and US retail sales data for April due out at 13:30 BST.


The dollar continued to trade higher yesterday as earlier comments by Fed Chair Jerome Powell, which all but rejected the idea of negative rates, bode well for the greenback. Yesterday’s employment data showed that the number of US citizens seeking unemployment benefits increased by 2.98 million compared to the expected 2.5 million, leaving the initial jobless claims in the millions for two months straight. The numbers are still extraordinarily high, but they are declining every week. New claims in states that have begun easing containment measures have not fallen en masse, though the average has decreased. The dollar briefly fell on the back of the release, but the upward surprise of the reading was not enough to override the improved dollar sentiment. The ongoing US-China tensions remain fragile after US President Donald Trump threatened to further strain relations by “cutting off the whole relationship” with China for mishandling the beginning phases of the pandemic. In his comments to Fox yesterday, Trump suggested once again a ban on Chinese listings on the US stock exchanges if they do not follow US accounting rules while acknowledging the downside risks to such a move. Any developments in US-China talks will be closely monitored by markets, as well as today’s retail sales at 13:30 BST and industrial output at 14:15 BST.


The euro extended its losses against the dollar yesterday and hit a fresh low for the week as improved sentiment around the greenback continued to weigh on the euro. Italy’s government approved a €55 billion euro stimulus package to help the Italian economy climb out of the pit that the two-month nationwide lockdown left the country in. Prime Minister Giuseppe Conte announced emergency income measures and extra funding for companies and tax cuts, as well as non-reimbursable grants for SMEs. The easing of containment measures combined with the additional stimulus should help to set the nation’s economy in motion again, but this wasn’t to be reflected in the single currency. With fiscal support packages increasing, the European Central Bank’s eagerness to accommodate this and compress the spreads between the southern European nations debt and that of Germany and France will be put to the test. With heightened debt issuance remaining a theme in the eurozone, the ECB will face pressures to keep the bund-BTP spread to a minimum. Italy’s increased government spending may look troublesome for public debt in the short-run, but it can certainly be a step in the right direction to revive the economy. This morning’s German flash Q1 GDP figures showed a contraction of the German economy of 2.2%, similar to expectations. The euro edged slightly higher around the data release, but eurozone GDP data released at 10:00 BST could change this.


Sterling touched fresh lows against the dollar yesterday as GBPUSD hit its lowest point since April 7th. The only noteworthy event was the Financial Times Global Boardroom conference, where newly appointed Bank of England Governor, Andrew Bailey, highlighted that negative rates couldn’t be ruled out from the UK’s central bank. While Bailey said heading into negative territory, from the current lower bound of 0.1%, wasn’t something they’d like to do due to its impacts on the transmission of previous rate cuts to the real economy, it didn’t stop markets continuing to toy with the idea that they’re on the horizon. This has become an increasing theme in the G10 space and something that most central bankers are keen to quash for now at least. With the UK the latest economy to succumb to negative rate expectations, the pound continues to face heightened selling pressure. This is evident in today’s session where sterling joins the Kiwi dollar is sustaining losses as expectations of negative rates increase, while most of the G10 sits mildly higher against the greenback. Current OIS pricing suggests the Bank of England dipping their toe into negative territory as early as Q1 2021, but the market isn’t yet convinced to fully price this in. Today’s headlines focus on reports that the UK Treasury are seeking to increase the loan amount medium-sized businesses can borrow under the Coronavirus Large Business Interruption Loan Scheme (CLBILS). Currently, firms with turnover of more than £250m can apply for loans up to £50m, but many suggest this won’t be enough to see them through the pandemic period. One suggestion see’s the amount quadrupled to £200m, which would further shelter the UK economy and likely see increased support for the flailing pound. Additionally, the latest round of Brexit talks wind down today with the deadline to seek another extension rapidly closing in. With the end of June not far away, both UK and EU remain some distance apart on fisheries and the EU’s courts.



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