The Bank of Canada surprised financial markets yesterday by following the US Federal Reserve’s lead and reduced their own interest rates by 0.5%, citing the spread of the coronavirus represents a “material negative shock” to the Canadian economy. The central bank updated its outlook to “clearly weaker” and analysts now expect further cuts of 0.25% in April and 0.25% in June.
The Canadian dollar fell sharply in the following hours, EURCAD rose by 0.85% to a high of 1.4949, just shy of the 9-month high of 1.4959 seen earlier in the week, USDCAD rose by 0.7% to a reach 1.3432 whilst GBPCAD climbed to1.7248.
Kristalina Georgieva, managing director of the IMF said the coronavirus outbreak is likely to reduce global economic growth to its lowest levels since the financial crisis of 2008 when GDP fell by 0.7%. The IMF said growth this year would be below last year’s 2.9% and much lower than the 3.3% previously forecast.
The pound had a strong day yesterday, making big gains against the euro and US dollar following comments from incoming Bank of England Governor Andrew Bailey which said the BoE and British Government should work in tandem offset the effects of the virus outbreak.
This helped to curb expectations of the Bank of England taking similar action to the Fed’s emergency 0.5% interest rate cut on Tuesday with markets now expecting a 25bps cut at the next meeting on March 26th.
Data released in the UK showed the best level of activity across all 3 of the Purchase Managers Index sectors since September. A jump in construction activity outweighed small drops in the manufacturing and services sector. Composite PMI for February rose to 53.0 from 52.8 in February but the survey took place before the coronavirus outbreak had taken hold.
GBPEUR fell to a 4-month low of 1.1443 early in the morning but recovered someone of the 5% it has lost in the last 2 weeks to climb by over 1% eventually reaching a high of 1.1559 early in the evening.
GBPUSD rose from a low of 1.2776 by around 0.75% to reach a 3-day high of 1.2872.
The US dollar recovered some of its recent losses against other currencies as traders waited to see which other major central banks would make emergency interest rate cuts.
The euro had been one of the currencies to make recent gains against the US dollar, reaching a 2-month high of 1.1193 on Tuesday, but it slipped on Wednesday as markets now anticipate the ECB to reduce its already negative -0.50% interest rates by another 10bps next week.
EURUSD fell from a high in the morning of 1.1183 to a session low of 1.1106.
