What’s happening: The Canadian dollar climbed to a three-month high versus the greenback on Wednesday.
What happened: After Tiff Macklem took over as the new governor of Bank of Canada yesterday, the benchmark interest rate was left unchanged at a record low of 0.25%.
Although this was widely expected, the central bank also announced to lower the frequency of emergency operations it had adopted recently to provide support to the equity market.
Yesterday’s policy decision statement had few inputs from the newly appointed governor and investors are expecting Tiff Macklem to bring some change in perspective about handling the coronavirus crisis.
Why it matters: Canada's central bank has lowered its benchmark interest rate significantly since the beginning of the coronavirus outbreak, reducing rates from 1.75% in February to the current 0.25%.
The Bank of Canada said in a statement that the impact of covid-19 on the global economy is likely to have peaked and the Canadian economy appears to have evaded the worst-case scenario. This improved sentiment in foreign exchange trading.
Policymakers had earlier announced plans to buy various bonds and debts to maintain liquidity in the markets. In a statement yesterday, the central bank said, “The Bank’s programs to improve market function are having their intended effect.” Given the improvement in short-term funding conditions, the Bank of Canada decided to scale back some of its emergency operations. The central bank said it plans to lower the rate of its term repo operations to just once a week and the purchase of bankers' acceptances to twice a week.
Sentiment in the currency market was also lifted by the global rally in shares yesterday, after news of a strong rebound in China’s service sector activity in May. Commodity-based currencies, including the loonie, are expected to benefit form the improved outlook for China’s economy.
Crude oil, Canada's major export product, also climbed to its highest since March, despite doubts of whether the OPEC and its allies will extend their output cuts.
Canada’s labour productivity surged by a record 3.4% in the first quarter. The country’s government bond yields also rose, with the 10-year yield rising 8.1 basis points to 0.623%.
The Canadian dollar rose 0.2% to 1.3490 versus its US counterpart. The currency reached its highest intraday point since March 9 and has climbed around 9% after plunging to a four-year low in March.
What to watch: Traders await the balance of trade data from Canada, which is likely to decide the currency’s performance in today’s session. Canada’s trade deficit, which increased to C$1.4 billion in March, is expected to widen to C$2.36 billion in April. Exports from the country are projected to drop to C$42.07 billion in April, from C$46.26 billion in March, while imports could decline to C$41.37 billion, from the earlier month’s C$47.67 billion.
Economic reports from the US will also be in focus. The country is expected to release data on balance of trade, nonfarm productivity and initial jobless claims. More investors are likely to open forex demo accounts or seek trader affiliate partnership programs to trade the USD/CAD pair.