Canadian Dollar Mixed As BoC Cuts Interest Rates Amid Covid-19 Fears

The Canadian dollar is trading mixed against multiple currency rivals midweek after the central bank delivered on a cut to interest rates. The Bank of Canada (BoC) joins a growing chorus of institutions that are slashing rates this week in response to the growing concerns over the economic fallout from Covid-19. Will it be enough to fight the outbreak or will more monetary easing be necessary?

The BoC lowered rates by 50 basis points from 1.75% to 1.25%, which is more than what many experts had forecast in recent days. Policymakers cited the virus for the first rate cut in five years, adding that the central bank could introduce more stimulus to reverse the slowdown.
BoC Governor Stephen Poloz said in a statement:

Before the outbreak, the global economy was showing signs of stabilizing. While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding.

The central bank also listed weaker business investment, rail line blockades, and stronger than expected inflation for its rate cut decision.

In light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.

Analysts note that if it were not for the Federal Reserve imposing a 50-basis-point cut on Tuesday that the BoC would have opted for a quarter-point adjustment. The main concern now is that lower rates will likely fuel demand for mortgages and other credit instruments, exacerbating soaring household debt levels. Ostensibly, the biggest concern for Canadian policymakers is containing the virus’ impact on the fragile national economy.
On the data front, the IHS Markit manufacturing purchasing managers’ index (PMI) rose 51.8 in February, up from 50.6 in January. The market had penciled in a reading of 50.2. Labor productivity slipped 0.1% in the fourth quarter, down from the 0.2% gain in the previous quarter.
On Friday, the February jobs report and January trade numbers will be published.
Energy markets rebounded in the middle of the trading week. April West Texas Intermediate (WTI) crude oil futures added $0.64, or 1.36%, to $47.82 per barrel. April natural gas futures jumped $0.02, or 1.02%, to $1.82 per million British thermal units (btu).
The USD/CAD currency pair rose 0.07% to 1.3396, from an opening of 1.3381, at 15:01 GMT on Wednesday. The EUR/CAD fell 0.19% to 1.4926, from an opening of 1.4950.

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