The loonie reclaimed some of Wednesday’s losses in yesterday’s session despite WTI’s inability to hold above the $20 mark. Exiting Governor of the Bank of Canada, Stephen Poloz, stated that the central bank would have cut policy rates by 100bp on the fall in crude oil prices alone, potentially even 150bp if that was the only shock, when speaking before the House of Commons finance committee. The governor said the central bank can use asset purchases and related tools without limit and that the Governing Council is ready to augment programs as needed to sustain market performance. The commentary focused on Large Scale Asset Purchases (LASPs) which Poloz stated can be “much bigger [in] scale than what we’re proposing at this point”, which reiterates our view that a further expansion in the bank’s balance sheet will be the marginal easing tool going forward. The bank’s commitment to providing growth stimulus and therefore supporting a V-shaped recovery was reiterated by the government yesterday as well. Prime Minister Trudeau unveiled the Canada Emergency Commercial Rent Assistance program, which will provide loans for landlords who lower or forgo rent payments from their business tenants between April and June. The widening of the Canada Emergency Business Account, a government guaranteed credit program to provide small businesses with C$40,000 in loans, means companies with payroll costs of up to C$1.5m are now eligible vs C$1m previously. Trudeau said more than 195,000 loans have already been approved since it launched on April 9th, costing the government C$7.5bn already. These measures add additional support for SME’s and pave the way for the Bank of Canada expanding its purchases into the commercial MBS market. Yesterday’s announcement of additional stimulus measures helped the loonie retrace some of this week’s losses but the rally stalled as oil slid back to fresh 2002 lows this morning. The Canadian dollar still remains over a percentage point away from this week’s high.
The dollar is trading lower at the margin overnight, with the G10 currencies following a pattern consistent with an improvement in risk appetite. The size of the moves has not been sufficient to fully offset the price action from the rest of the week, and on a 5 day basis the dollar is still up against most major currencies, with the Japanese yen the major exception. The improvement in risk appetite of the past 24 hours coincided with an equities rally, which seemed to be triggered by headlines regarding a favourable clinical trial for covid-19 treatment. Yesterday’s biggest news consisted of economic data, which further highlighted the severity of the recession facing the US, and guidelines from the Trump administration on the reopening of the US economy. Despite previous rhetoric that suggested the White House would seek to implement an early, centrally managed re-opening of the economy, the guidelines seemed to give state Governors leeway in their implementation. The guidelines recommend that after two weeks of declining infection intensity, states moved to a gradual three phase loosening of restrictions. On the data front, initial jobless claims topped 5 million, consistent with consensus estimates. The aggregate number of initial jobless claims over the past month are now greater than 20 million, effectively undoing the past decade of job gains under Presidents Obama and Trump.
With general risk appetite improving overnight, the euro managed to retrace some of its recent losses against the dollar. The relief did not last long, however, as this morning’s data included a sharp contraction of 55.1% in eurozone new car registrations in March, compared to a prior decrease of 7.4%, which adds to a series of disappointing but not unexpected data for the eurozone. France’s President Emmanuel Macron voiced concerns over the lack of financial solidarity in the European Union and warned of a collapse of the Union if the member states do not set up a mutual debt response. European Commission President Ursula von der Leyen stated in a speech at the European Parliament Plenary on Thursday that the EU budget should be “the mothership” of efforts to revive growth after the coronavirus pandemic, and apologised to Italy for a slow response, acknowledging that “too many were not there on time when Italy needed a helping hand at the very beginning”. EU leaders will hold a conference call next week to further discuss a potential increase in the Union’s budget firepower. On the monetary side, the European Central Bank signalled its commitment to “do everything necessary within its mandate to help the euro area through this crisis”, and stated that the central bank is “fully prepared to increase the size of its asset purchase program and adjust their composition, by as much as necessary and for as long as needed”.
Sterling is trading roughly flat against the US dollar compared to yesterday morning, having managed to scrape itself up off fresh lows reached late last night. Against the euro, the pound remains conformably higher on the week. Domestic UK news flow has been largely beside the point for the pound this week, as it has traded in line with other small, open, developed economies. Bank of England MPC member Silvana Tenreyro gave a major speech on inflation and monetary policy in the context of the coronavirus pandemic, and warned that inflation would likely fall below 1% in the near future. Tenreyro steered well clear of giving any direct guidance on the BoE response, but did note that the recovery from the economic shock of the lockdown in Q2 will be less rapid than one would like. The next Monetary Policy Report is due to be released on May 7th, and will feature a more comprehensive official assesment of the macro outlook.