Canadian Dollar Rallies on Chinese Stimulus, Higher Crude Prices

The Canadian dollar is rallying midweek on China’s latest announcements of fiscal and monetary stimulus to combat the negative economic effects of the Wuhan coronavirus, also officially known as Covid-19. The loonie also benefited from soaring crude oil prices on Wednesday, but gains were capped on warnings that the rail blockade by protesters will affect the national economy.

This week, Beijing unveiled a series of measures to shield the world’s second-largest economy from the coronavirus’ lasting economic effects. The federal government has announced it will introduce targeted tax cuts, in addition to across-the-board tax reductions. It will further approve major construction projects, expand the annual budget deficit ratio by 0.3%, and allow municipal governments to issue more bonds to pay for infrastructure.
The People’s Bank of China (PBoC) decreased the interest rate on medium-term loans, encouraged banks to â€œtolerate” more bad loans, and told financial institutions to ramp up lending efforts. The next measures the PBoC will likely take, according to local experts, is a reduction in the reserve requirement ratio (RRR) and a cut to its benchmark lending rate.
A decline in the number of new coronavirus cases triggered optimism, too. The global death toll has officially reached 2,000 and the number of confirmed cases topped 75,000.
All of these moves helped global financial markets and renewed confidence among investors that Beijing can limit the economic fallout from the virus outbreak. It contributed to the rally in energy prices since many analysts believe the drop in demand may be less than what is projected.
March West Texas Intermediate (WTI) crude oil futures advanced $1.36, or 2.61%, to $53.41 per barrel on the New York Mercantile Exchange. US crude prices have slumped 13% year-to-date on demand concerns.
Canada remains a major commodities nation, particularly oil, so the economy could take advantage of improved prospects for growth.
On the data front, the annual inflation rate surged to 2.4% last month, December manufacturing sales fell 0.7%, and foreign securities purchases plunged $9.57 billion. Housing and retail sales figures are next on this week’s schedule.
Meanwhile, the Canadian Manufacturers and Exporters (CME) organization sounded the alarm at a news conference on Tuesday, warning that the rail blockades will lead to plant closures and temporary layoffs. Via Rail issued temporary layoffs to 1,000 workers. Across the country, protesters are standing in solidarity with the Wet’suwet’en hereditary chiefs who are opposed to a new liquid natural gas (LNG) pipeline being constructed in British Columbia.
The mixed news may not push the central bank to ease monetary policy as the odds of the Bank of Canada (BoC) cutting interest rates have diminished. According to the overnight index swaps market, the chances of a rate clip slid from 50% to less than 40%.
The USD/CAD currency pair tumbled 0.23% to 1.3230, from an opening of 1.3260, at 18:58 GMT on Wednesday. The EUR/CAD slipped 0.18% to 1.4281, from an opening of 1.4310.

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