The Canadian dollar is sinking. The Bank of Canada somewhat surprised markets yesterday when the slashed the overnight rate by 0.50 basis points, to 1.25% from 1.75%. The aggressive interest rate action follows on the heels of a similar move by the U.S. Federal Reserve on Tuesday.
The Bank of Canada statement was brief. It blamed the coronavirus outbreak for its actions saying: "the COVID-19 virus is a material negative shock to the Canadian and global outlooks." The bank continued to justify the move, noting "It is becoming clear that the first quarter of 2020 will be weaker than the Bank had expected. The drop in Canada’s terms of trade, if sustained, will weigh on income growth. Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments. In addition, rail line blockades, strikes by Ontario teachers, and winter storms in some regions are dampening economic activity in the first quarter."
The BoC hinted it would provide monetary stimulus on Wednesday when it released the statement of G-7 Finance Ministers and Central Bank Governors. It said, in part: "Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks. Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase."
The rate cut drove the Canadian dollar lower in a move that was exacerbated by plunging West Texas Intermediate (WTI) oil prices. WTI dropped 20% in a little over a week, and although prices have recouped some of those losses, the prospect of weak global crude demand is limiting gains. The Organization of the Petroleum Exporting Countries is meeting in Vienna today. There are rumours that Saudi Arabia is pushing the cartel to add another 1.5 million barrels per day of production cuts to the two million bpd announced in December. Russia has yet to agree.
Coronavirus hysteria is taking hold in the U.S. California declared a statewide emergency after just one elderly person died from the virus.
The man reportedly had a litany of health issues. Declaring an emergency after one death in a state with a population of 39 million is a tad overkill.
The Dow Jones Industrial Average soared yesterday and closed with a 4.4% gain. This morning, futures prices suggest a bit of payback with Wall Street opening in negative territory.
The U.S. dollar is on the defensive against the major G-10 currencies except against the Canadian dollar. BoC Governor Stephen Poloz delivers an "Economic Progress Report" today at 1:00 pm.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
