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Canadian dollar update – Wednesday March 4, 2020. Fed shocks markets with first emergency rate cut since 2008 financial crisis.

Canadian dollar update – Wednesday March 4, 2020. Fed shocks markets with first emergency rate cut since 2008 financial crisis.
Albert Edwards
by Albert Edwards on March 04, 2020

CURRENCY MARKET UPDATE

U.S. dollar highlights:

USD volatile after Federal Reserve Chairman Jerome Powell lowered the interest rate by 50 basis points. This surprise announcement initially caused USD lower, however, the greenback retreated while the 10-yields fell to a historic low below 1%. Last Friday, Powell said the central bank would “act as appropriate” and markets interpreted this as dovish with a 75% chance of easing (from 33%). After Monday’s G-7 meeting of finance ministers left the markets unsettled, Powell was proactive because of concern the economy will suffer from the Covid-19 infection. Equity prices have dropped during the past two weeks and China’s manufacturing sector is contracting due to many factories closed. The U.S. economy has not suffered from China’s shutdowns yet so the Fed is preparing and would rather be safe.

Canadian dollar highlights:

CAD defensive with all eyes on the Bank of Canada’s monetary policy decision. Markets are expecting Governor Poloz to follow the Fed and cut rates during his last speech. Central bankers pledged to work together to alleviate the global economy from the virus impact. The Reserve Bank of Australia and central bank of Malaysia also eased to put more pressure on Poloz. A rate cut is already priced in and there is a chance for more easing, so markets are expecting a dovish statement. After a slowdown in Q4 and rail blockades hurting the economy, markets are expecting three rate cuts this year. Meanwhile, crude oil prices are recovering, and the federal government reached a tentative pipeline agreement with the Wet’suwet’en.

Euro highlights:

EUR weaker after being overbought and reaching a six-week high. EUR support was also due to investors searching for safety and preferring treasuries. Recession fears continue rising amid the spread of the virus; however, the European Central bank remains patient regarding monetary policy because they are already in a record low negative rates. President Christine Lagarde is “ready to take appropriate and targeted measures” but may have to rely on increased public spending to boost the economy. Meanwhile, the unemployment rate for January remained at 7.4% and Core Inflation increased 1.2% yearly.

British pound highlights:

GBP firm but defensive as markets expect the Bank of England will also make an emergency rate cut this week. Prime Minister Boris Johnson is open to leaving the European Union without a deal and monetary policy has been on hold. The European Union wants to give the U.K. beneficial access to 450 million people, but Johnson said he is not bound by their rules. Fears of a no-deal Brexit due to trade uncertainty continue weighing on GBP.