Wednesday, April 15, 2020

Does the BoC have room to introduce additional stimulus packages for Canada?

  • Dollar
  • US Retail Sales
  • CAD
  • Bank of Canada


Analysts’ Pick: Does the BoC have room to introduce additional stimulus packages for Canada?

  • USD/CAD may be skewed to the downside for the day as a result of potential strength in the Canadian dollar and weakness in the greenback
  • March’s retail sales in the US may put more pressure on the dollar as economic data for March starts to show more tangible impact of the economic damage from the coronavirus
  • The BoC may look to expand its asset purchase program in either size or scope to further help the economy

March's retail sales dataset for the US is set to be released later today at 8.30pm (GMT +8). While the market expects a sharp decline in retail sales for the month due to lockdowns, we do think there's room for the actual figure to be worse-than-expected.

Retail Sales in the US looks likely to decline more than 2008’s 3.9% drop


The last time retail sales dropped sharply was during the 2018 trade war and the 2008 financial crisis before that. With lockdowns in place across multiple states in the US for almost half of the month of March, retail sales will likely drop much more than during the 2008 Financial Crisis which saw a 3.9% drop. But the dataset should see a surge in consumer staples as a result of a spike in panic-buying of essentials, as noted by Amazon increasing its worker capacity in mid-March to accommodate with the sharp increase in orders for necessities. Although, this should be outweighed by fall in non-essential categories, in particular vehicle and gas sales, travel spending and luxuries.

Auto sales, gas prices and consumer sentiment have all dived since the start of 2020


Vehicle sales dived in March to a 10 year low in the US, signalling a lower demand for transport spending as more people stay home. This will affect gas station sales as well, adding to the pressure on the top line amid lower gas prices. University of Michigan's preliminary estimate of consumer sentiment for April falling to 71.0 from 89.1 also implies that consumers expectation of a downturn is increasing, which therefore would mean that they are less likely to spend on non-essentials. Consequently, we see retail sales moving closer towards a 10% decline, instead of the -8% economist consensus. This tilts the dollar further towards the downside, adding to the downward pressure as the Fed and the US government floods the market with stimulus packages to prevent the economy from sinking deeper into recession.

Then later at night, the Bank of Canada (BoC) will be releasing its statement and decision on monetary policy at 10pm (GMT +8), with Governor Poloz's press conference on the decision following later at 11.15pm (GMT +8). While we do not expect the BoC to venture into negative rate territory, it may look to expanding its asset purchase program.

Overnight Index Swaps show financial markets do not expect another rate cut from the BoC


The central bank already cut rates by a total of 150bps since the start of the year, mostly following the lead of the Fed in the US. It also started asset purchases, of C$5bn worth of Canadian government bonds per week, in addition to C$100bn worth of securities purchased under resale agreements. Using the Fed as a proxy, the BoC may consider expanding the value of its weekly purchase, or expand its scope to non-government bonds, in order to control provincial yields in the country. Also, we expect more details from BoC officials on the timeline or target of its asset purchase program. Hence, putting some upside pressure on the Canadian dollar to outweigh the effects of a continued declining outlook to oil prices.

Oil prices likely weighed on the Canadian dollar as a result of the oversupply in the crude oil market


As a result, the USD/CAD may face some downward pressure later today, possibly falling past 1.3919's level towards 1.3821, or a downside potential of approximately 0.96%. Downside risks to the strategy includes the BoC not taking any action, or a sudden dive in oil prices which would weigh on the Canadian dollar.

Technical Analysis:         


USD/CAD has been on a downward trend in the last two to three weeks as volatility in financial markets eased, thanks in part to the Fed and US government’s actions with large stimulus packages. With new cases of the coronavirus starting to possibly peak in the US, demand for lower risk assets have also gone down, allowing the bears to push the currency pair back down to trade around the 50% Fibonacci retracement level, trading well below the 50-day moving average. While the bulls have managed to push USD/CAD back above the 50% Fibonacci level of 1.3919, we believe this maybe temporary, as the outlook for the dollar continues to skew negative. The Stochastic RSI while not in overbought region yet, signals that the currency pair has room to fall.  As a result, the bears looks likely to put more pressure on USD/CAD, pulling it back downwards to test 1.3873’s level, which if broken will likely move to test the next support level at 1.3821.

Support: 1.3873 / 1.3821 / 1.3753

Resistance: 1.3940 / 1.4048 / 1.4124

USD/CAD Chart (H4)