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Canadian Dollar Update, March 19, 2020 – Canadian Dollar in distress

USD/CAD Open: 1.4518, Overnight Range: 1.4424-1.4667

Oil is at $22.38 and gold is at $1,486.90. US markets are higher today.

The short-term USD/CAD technicals are neutral-bearish. For today, USD resistance is at 1.4597. Support is at 1.4293.

The Canadian dollar is in distress. So are the rest of the G-10 major currencies. Financial markets are stressed, and that is feeding fears of a liquidity crunch. Equity markets are in turmoil. The Dow Jones Industrial Average is down 19.8% since the start of the year. Other global equity indexes are in the same boat. Plunging stock prices caused other problems. Gold dropped alongside side stocks as traders scrambled to raise cash, and the cash they wanted was US dollars. The US Dollar Index (DXY), often considered a US dollar sentiment proxy climbed 6.5% since March 9.

Another major issue behind US dollar demand is global equity portfolio managers forced to unwind hedges. These foreign managers hold large equity positions, hedged to their home currency.

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When the stock indexes decline, their hedge ratios become too large. They are forced to sell US dollars to get them back in line.

Another factor behind the surge in US dollar demand is the American economic outperformance compared to the rest of the G-10 nations. The American economy was still growing, even as the Eurozone economies were flirting with a recession.

Saudi Arabia’s disappointment at Russia’s refusal to cut crude production to support prices sparked the oil price collapse. The Saudis slashed prices and opened the taps, flooding the market with cheap crude.

West Texas Intermediate dropped to a low of $20.10/barrel yesterday which ignited another firestorm of Canadian dollar selling.

The G-7 central banks are aggressively responding to contain the financial markets fall-out from the coronavirus pandemic. The Bank of Canada surprised markets with its decision to cut interest rates by 0.50% on March 13th. The US Federal Reserve stepped up to the plate Sunday night and knocked the ball out of the park. They slashed rates by 100 basis points. The benchmark Fed Funds Rate is essentially 0%. The Reserve Bank of Australia held an emergency meeting today and chopped its Overnight Cash Rate (OCR) to 0.25% from 0.50%. The European Central Bank jumped into the fray last night as well.

The ECB announced a new €750 billion quantitative easing program calling it the Pandemic Emergency Purchase Program. It will make purchases in all the asset categories that are currently eligible and will do so until at least the end of the year.

The ECB justified its actions saying “the ECB will ensure that all sectors of the economy can benefit from supportive financing conditions that enable them to absorb this shock. This applies equally to families, firms, banks and governments. The Governing Council will do everything necessary within its mandate. The Governing Council is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed.”

The Canadian dollar rose and sank alongside EURUSD moves following the ECB announcement and will continue to track broad US dollar sentiment today.

Today’s Suggested Range USD/CAD: 1.4470 – 1.4570

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By KBFX | March 19, 2020 | Daily Update | 0 comments