The Canadian dollar is vulnerable to renewed selling pressure after the U.S. Federal Reserve surprised markets yesterday. The Fed slashed the Fed Funds range to 1.0-1.5% from 1.5-1.75%, in the first in rate action between scheduled meetings since 2008.
The Fed statement was short and to the point. It read "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1-1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."
Wall Street did not react in typical fashion. Usually, a large and surprise interest rate cut would send the major stock indexes soaring. Not this time. The Dow Jones Industrial Average, S&P 500, and NASDAQ plunged, closing with loses close to 3.0%. Traders did not believe the Fed’s actions would do anything to support an economy suffering from coronavirus triggered, supply chain disruptions.
The 50-basis-point rate reduction wasn’t enough for President Trump. He tweeted "The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!"
FX traders reacted to the Fed move and sold US dollars against the G-10 majors, closing yesterday’s Toronto session with losses across the board except against the Canadian dollar, which slipped modestly.
The Bank of Canada meets today and were widely expected to cut the overnight rate from 1.75% to 1.5%.
That changed after the Fed move, and now traders expect the BoC to mirror the U.S. move. If the BoC only cuts 0.25%, the Canadian dollar may rally. However, it should be short-lived as analysts will expect a follow-up move in April.
The damage from the railway blockades, negative sentiment from cancelled mega-energy projects, and ongoing supply-chain disruptions from COVID-19 will continue to undermine the currency.
The Canadian dollar is not getting much support from the overnight rally in crude prices. West Texas Intermediate (WTI) climbed to $48.20/barrel from $46.82. The rally was due to rumours that Saudi Arabia and the Organization of the Petroleum Exporting Countries were seeking larger than expected production cuts to shore up prices.
Today’s U.S. Institute for Supply Management Non-manufacturing Purchasing Managers Index report will be ignored because of yesterday’s Fed action.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
