BOC Cuts Rates by 0.5%

The severity of the ongoing COVID-19 outbreak has been made very clear this week. Following a well-expected rate cut from the RBA on Tuesday morning and a surprise rate cut from the Federal Reserve on Tuesday evening, the BOC became the third central bank in the G10 bloc to cut rates this week. The BOC lowered its overnight rate by 50 basis points to 1.25%.

In the wake of the surprise move from the Fed, such a reduction is well explained. However, in the context of the BOC’s last meeting, the rate reduction is a frustrating development for CAD bulls. Last time around, the BOC struck a resolutely optimistic tone and signalled that it saw no rate cuts this year, in line with the trajectory of both the domestic and global economy.

Since that meeting, however, the eruption of the COVID-19 crisis has dramatically altered the global landscape. Trade levels have been knocked heavily lower as have equities and commodities prices. The more than $20 fall in oil prices this year will no doubt have taken the BOC by surprise and caused a significant reassessment in its outlook.

COVID-19 A Significant Threat

In the statement released alongside the decision, the BOC highlighted its changing view saying: “Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.”

Ready To Ease Further

In terms of the forward guidance, the BOC was clear in reassuring the market that it stands ready to ease further if necessary saying: “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.”

Technical View

CADJPY (Bearish below 81.74)

From a technical viewpoint. The sell off in CADJPY has seen price breaking down through the rising trend line and the monthly pivot at 81.74. Price has so far stalled at the 79.87 support, Unless we see a recovery from here we are likely to see a further move down to the yearly S1 at 78.50, which is also the 2019 low and a key long term level.

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