March 6, 2020

USDCAD open (6:00 am EST) 1.3400-04     Overnight Range 1.3382-1.3418

Wall Street is in the grip of coronavirus terror.  Traders were less than impressed with the Fed’s 50 bp rate cut on Tuesday and continued to sell stocks.  The Dow Jones Industrial Average closed yesterday down 9.75% MTD.  

FOMC members and NY Fed President John Williams said about Tuesday’s action “Our policy action this week positions us well to support the economic expansion.”  Dallas Fed President Robert Kaplan said “he hopes the disruption to the U.S. economy will last only a quarter or a bit more, and that the rate cut this week will help the economy recover faster.”  Minneapolis Fed President Neal Kashkari said This was an insurance that we took out because nobody knows how bad the virus is going to be.”

Those words were not enough to dampen speculation of another Fed rate cut at the March 18 meeting.  As per CME FedWatch, the odds for another 0.50% cut are 75%.  Gold and bond prices soared, while Opec/Russia’s failure to agree to deeper crude production, sank oil prices.

Fear of another rate cut trashed the US dollar overnight, which lost value against the major G-10 currencies. The Canadian dollar is only currency to open today, higher than it was at Monday’s open.

 Chart: Currency gain/loss (%) against the US dollar from Monday NY open to Friday  NY open (6:00 EST)

Source: Saxo Bank/IFXA

FX Recap and outlook: Canada added 30,300 jobs in February, easily beating the 10,000 gain that was forecast. The news didn’t do the Canadian dollar any favours.  USDCAD stayed bid, and then traded higher, toward the overnight peak.  That’s because the US Nonfarm payroll results were well-above predictions.  NFP rose 274,00 compared to the forecast of 175,000.  Average hourly earnings and the unemployment rate were as expected.  

FX traders didn’t seem to care.  The US dollar remained under pressure due Fed rate cut and COVID-19 fears.

EURUSD soared overnight,  rising from 1.1212 to 1.1334 in New York trading with the breach of 1.1250 triggering stop-loss buying and exacerbating the rally.  US rate cut fever is driving EURUSD demand, but does anyone really believe that the EU and Euro-area are better positioned to handle the COVID-19 outbreak?   The Economist magazine wrote that the outbreak risks tipping Italy and Germany into a recession. The US economy is in far better shape than that of the EU and US rates are still positive. The EURUSD technicals are bullish with the break of 1.1210 targeting gains to 1.1420.

GBPUSD rallied from 1.2950 to 1.3025 in early New York trading, underpinned by Fed rate cut fever and the subsequent broad US dollar weakness.  However, gains may be limited as some analysts forecast that the bank of England will cut rates, March 26. On-going EU/UK trade talks may also limit gains.

USDJPY plunged alongside the slide in US Treasury yields. The 10-year yield dropped to 0.70% from 0.924%, a new record low, overnight. It managed to claw back some losses and is trading at 0.786%.

AUDUSD and NZDUSD are in demand.  Prices are also supported by speculation that the antipodean currencies are underpinned because they led the Central Bank rate-cutting effort, so for them, the worst is over.

Oil prices sank due to Russia balking at Saudi Arabia’s plan for an additional 1.5-2 million barrels per day of crude production cuts.

USDCAD was excluded from the US dollar sell-off party due to oil prices and Bank of Canada policy risks. BoC Governor Stephen Poloz said yesterday that a rate cut was necessary because downside economic risks outweighed financial vulnerabilities.  Another interest rate reduction cannot be ruled out, especially if the Fed eases again. 

USDCAD Technical Outlook

The intraday USDCAD technicals are unchanged.   This week’s 1.3315-1.3435 range is still intact, although there is an upward trend above 1.3380   A break above 1.3430 extends gains to 1.3550.  A break below 1.3380, targets 1.3340. For today, USDCAD support is at 1.3380 and 1.3340.  Resistance is at 1.3430 and 1.3460.  Today’s range 1.3360-1.3440

Chart: USDCAD  30 minute

Source: Saxo Bank