News & Analysis


The loonie briefly strengthened after yesterday’s surprise rate cut from the US Fed, but soon afterwards found itself once again on the back foot and closed lower against the greenback. The Bank of Canada has a high stakes rate decision today, which will be announced at 15:00 GMT. Canada’s official interest rates are now comfortably the highest in the G10 economies and well above the effective US rate, while the global coronavirus outbreak continues to threaten worsening risks to both global and Canadian growth. In this context, a rate cut from the BOC seems highly likely today, with the main source of uncertainty being the size of the move. The decision will not be straightforward: a 25 basis point cut may prompt a loonie rally due to markets expecting a larger move, while a 50 basis point cut could carry the risk of stoking a housing market bubble.


The dollar was rocked by the seismic news of an intra-meeting rate cut of 50 basis points from the Federal Reserve yesterday, and quickly undid recent progress against currencies like AUD, SEK and NZD, as well as many previously troubled emerging market currencies. The Fed’s surprise rate cut was the first outside of a regular monetary policy meeting since 2008, and was accompanied by a press conference where Fed chair Jerome Powell said the US economy remained strong, but that the early indicators of the virus’s impact had worsened the outlook and prompted a rate cut. On the surface, the rate move did look like markets have bludgeoned the Fed into cutting rates. OIS markets were pricing in 50 basis points of cuts as early as the end of last week, and interbank lending rates have been plummeting at rates not seen since 2008 over the last week. Leaving rates unchanged, or not delivering on expectations of a cut, would have further tightened financial conditions. The cut shows the extent to which the coronavirus outbreak has proven to be far worse than the previous base case assumption shared by central banks, which anticipated the outbreak would be contained and a relatively rapid recovery would occur in Q2. US equities closed lower yesterday despite the rate cut, indicating that the era where marginal changes in monetary policy could instantly send equity prices to fresh all-time highs and allay fears of a growth slowdown may finally be coming to an end. Elsewhere, the race to become the Democratic party nominee for the US Presidency became a two-horse race, after Joe Biden gave a strong showing at yesterday’s 14 state nomination votes. Biden won 9 races, while his Rival Bernie Sanders won four including California. Today at 13:15 GMT ADP will release its estimate of non-farm payrolls, followed by services purchasing managers indices from Markit and ISM at 14:45 and 15:00 respectively.


The euro found support in the Federal Reserve’s surprise decision to cut rates with 50 basis points in an intra-meeting policy change, and jumped to levels not seen since the beginning of the year. This morning, EURUSD has retreated from yesterday’s highs following the early results of the Super Tuesday primaries. Considering that the eurozone may be more susceptible to the economic impacts of the coronavirus than the US, the European Central Bank may soon follow in the Fed’s footsteps. However, the ECB has limited scope for rate cuts considering its current negative interest rate levels and called for the need for fiscal policy repeatedly. ECB’s Francois Villeroy de Galhau mentioned in an interview with the Dutch newspaper De Telegraaf that “our current monetary policy is already very expansive and acts as an economic stabilizer”, and that “governments with fiscal space should use it”. Governing Council member Robert Holzmann mentioned that targeted longer-term refinancing operations will be under consideration in the policy meeting, but he does not see an urgency for the measure. This morning’s German retail sales release showed a sharp expansion of 0.9% MoM in January, matching consensus. Though the increase was expected, the retail sales come as a good start to the year amid the coronavirus spread, suggesting that the virus’ direct impact on the German economy appears to be relatively low judging by the current headlines. Markets turn their focus to the final Eurozone PMI prints which will be released between 08:15 and 09:00 GMT.


Amid yesterday’s momentous events in the US and the resulting market turmoil, sterling found itself relatively out of the limelight and continued to hover near yesterday’s lows against the euro, while rallying slightly against the US dollar. Outgoing Bank of England governor Mark Carney told lawmakers of Parliament’s Treasury committee that the BoE would be prepared to cut interest rates if necessary to mitigate the impact of the coronavirus outbreak. Carney emphasized that the virus was likely to be a temporary shock, and that the Bank’s role was to prevent “viable” businesses closing due to temporary virus containment measures. In a nod to possible rate cuts, Carney said that it was “plausible” that the negative demand shock would be greater than the inflationary supply shock of the virus. Yesterday’s data included a decent print for the construction purchasing managers’ index, which tose to 52.6 in February. This morning will see the release of the services PMI at 09:30 GMT.



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