The Canadian dollar stepped back from the abyss seen on Friday. USD/CAD climbed steadily peaking at $1.3455 as COVID-19 pandemic fears gripped financial markets. The Dow Jones Industrial Average was threatening to close with another 1,000-point loss, and oil prices were in free-fall. Then Federal Reserve Chair Jerome Powell rode to the rescue. At 2:30 pm, he released a statement. It said: "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy." A sigh of relief echoed across Wall Street, and the DJIA recouped two thirds of its losses for the day. The U.S. dollar retreated following the statement, and USD/CAD closed at $1.3396.
Despite Powell’s comments, FX markets were extremely nervous when they opened in Asia.
Traders were spooked by news of a surge in COVID-19 cases in Italy, Spain, South Korea, and Iran. Also, Turkey/Syria hostilities and a missile test by North Korea didn’t help risk sentiment.
The Organization for Economic Cooperation and Development (OECD) slashed its G-20 growth forecasts from 2.9% to 2.4% because of the coronavirus, warning that if it became a pandemic, growth would slow to 1.5% in 2020.
The U.S. dollar opened in Toronto today, with losses against all the G-10 major currencies except for the British pound, due to rising expectations of coordinated G-7 interest rate cuts. French Finance Minister Bruno LeMaire got the ball rolling when he told a TV network; "There will be a concerted action. Yesterday I spoke with the G7 president, the U.S. Treasury Secretary Steven Mnuchin, and this week we will have a meeting by phone of the finance G7 ministers to coordinate our responses."
EUR/USD rallied to $1.1120 from $1.1038 with better-than-expected German, and Eurozone Manufacturing Purchasing Managers' Index reports underpinning the gains. However, the main euro-area equity indexes are deep in the red as are U.S. equity futures.
GBP/USD is in another world again. It didn’t participate in the broad U.S. dollar selloff, and it is trading just above its overnight low of $1.2735 in Toronto. Traders are more concerned about the onset of the European Union and U.K. trade talks, which are expected to be acrimonious. There is an elevated risk that Britain does not secure an agreement by the end of the year.
The Canadian dollar is continuing to rally in early Toronto trading, with prices closely tracking EUR/USD moves. A Bank of Canada rate cut on Wednesday is discounted on expectations for a near-term rate cut by the Fed.
Today’s U.S. Institute for Supply Management Manufacturing report may take a back seat to Wall Street price action, and coordinated interest rate cut rumours.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
