04 June 2020

Canadian Dollar Erases Coronavirus Weakness

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News shaping
the markets today

     

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.

The Markets Today

     

Gold trading will be in focus today, after the precious metal dropped to its lowest level in more than three weeks.

Context: Gold prices settled lower on Wednesday, hitting their lowest level since May 11, with the precious metal failing to find traction due to the strong momentum in equities. The news of a lower-than-projected decline in US private payrolls supported stock and forex trading.

Details: Gold was unable to find much traditional safe-haven support despite protests across the US. Although some were peaceful, most protests were violent with reports of looting of stores.

US stock indices trading gained momentum on Wednesday on optimism over the reopening of the economy and a report from Automatic Data Processing showing that the private sector had shed 2.76 million jobs last month, much lower than the expected 8.66 million.

Gold for August delivery plunged 1.7% to settle at $1,704.80 an ounce, with prices declining for the third consecutive session. The SPDR Gold Trust ETF also fell 1.7% on Wednesday.

Among other metals, July silver declined around 1.7% to $17.958 an ounce, while July copper slipped 0.1% to $2.4875 a pound.

What to watch: With the dollar index dropping to a two-month low, gold is likely to be supported by a weaker greenback. Protests in the US and rising tensions between Washington and Beijing are also expected to support the precious metal. Gold futures rose 0.2% to $1,708 an ounce in the Asian session.

Other Markets: US indices closed higher on Wednesday, with the Dow Jones index, S&P 500 and Nasdaq 100 up by 2.05%, 1.36% and 0.78%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Eurozone construction PMI, retail trade and ECB’s interest rate decision, France’s construction PMI and retail sales, Germany’s construction PMI, Italy’s construction PMI, Argentina’s industrial production, UK’s new car registrations and construction PMI, South Africa’s current account as well as the US Challenger job cuts, balance of trade, unit labour costs, labour productivity, initial jobless claims and natural gas stocks change.

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