The Canadian dollar was sidelined overnight. A wave of bearish sentiment swamped the U.S. dollar, but USD/CAD traders seemed oblivious to the developments. Crude oil prices and U.S. Treasury yields plummeted, and gold prices soared after what appeared to be another bout of panic selling on Wall Street.
The Dow Jones Industrial Average (DJIA) S&P 500 index and the NASDAQ all lost over 3% yesterday. That puts the DJIA’s year-to-date loss at 8.5%. Traders believe that Tuesday’s surprise 0.50% Fed Funds rate cut, following an emergency Federal Open Market Committee meeting, didn’t go far enough to shelter the U.S. economy from the impact of the coronavirus outbreak. The CME Fedwatch tool says the odds for another 0.50% rate cut on March 18 are 75%. A 0.25% cut is 100% priced.
Falling U.S. interest rates fueled US dollar selling against all the major G-10 currencies, except the Canadian dollar. EUR/USD streaked higher, rising from $1.1212 to reach $1.1340 in early Toronto trading.
The rally was exacerbated by stop-loss buying when prices went above the 1.1240-60 area. Fears that the Fed will continue to ease rates is overshadowing eurozone economic risks from the spreading coronavirus. Many European analysts are warning that Germany and Italy may fall into recession due to the economic impact of COVID-19.
Traders are also ignoring the fact, that even with another 50-basis-point easing, U.S. rates would still be well-above eurozone rates, and the European Central Bank has yet to respond to the coronavirus crisis.
USD/JPY plunged on the back of renewed risk aversion sentiment, and the steep drop in U.S. 10-year Treasury yields. Yields dropped to a record low of 0.70% overnight after starting the week at 1.16%. USD/JPY slid to 105.00 from 106.34.
The Canadian dollar is underperforming against the greenback compared to its peers because of free-falling oil prices. West Texas Intermediate (WTI) dropped 10.5% since Wednesday. Russia reportedly will not agree with the Saudi Arabia plan for another 1.5 million barrels per day in crude production cuts. Russia wants to wait and see if governments in the major economies inject fiscal stimulus into their economies. Low WTI prices are limiting Canadian dollar gains.
Canada and U.S. employment reports are released today. Usually, deviations from the job change forecast result in heightened, if short-lived, FX volatility. That is not likely to be the case today unless the deviations are extreme.
Canada is expected to add 10,000 new jobs and see the unemployment rate tick higher, to 5.6% from 5.5%. Merchandise trade and Ivey PMI reports are also on tap. The U.S. Non-Farm Payrolls are expected to show a gain of 175,000 jobs. However, U.S. interest rate sentiment, Wall Street price action, and COVID-19 headlines will drive trading today.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
