Bank of Canada Cuts Rates Again, USD/CAD Hits 4-Year High

Bank of Canada Cuts Rates Again, USD/CAD Hits 4-Year High
Written by:
Michael Harris
13th March, 22:55
Updated: 3rd April, 04:41
  • With today’s cut, the BoC slashed its key rate by 100 bps in only 10 days
  • The outbreak is “having serious consequences for Canadian families, and for Canada’s economy,” says the BoC in a statement
  • USD/CAD prints new 4-year high on worsening risk appetite and low oil prices

Bank of Canada (BoC) slashed its benchmark interest rate by 50bps from 1.25% to 0.75% for the second time in 10 days as the central banks worldwide continue to ease amid the coronavirus outbreak.

Fundamental analysis: New measures introduced

In addition to a rate cut, the Bank introduced a $10 billion credit facility program that will be available to businesses to help business activity. This facility program was designed jointly by the BoC and the Government, with hints of a bigger package in the pipeline for the next week.

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“It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy,” the central bank said in a statement.

Less than 10 days ago, the BoC announced a first rate cut from 1.25% to 0.75%. With today’s cut, the central bank has now slashed its main rate by 100 bps. In normal circumstances, the bank takes years to prepare the ground for such a big cut.

“This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices”, it is added in the statement.

The BoC has now joined the U.S. Federal Reserves, which also cut interest rates by 50 bps last week, a move which may be repeated in the next meeting scheduled for next week.

“Given the rapidly evolving nature of this virus, this will not be the last we hear from policymakers in the coming days,” National Bank of Canada analysts commented, hinting at a probable Fed cut next week.

Technical analysis: New 4-year high

USD/CAD has gained nearly 3% last week on the increased greenback demand, as well as the worsening risk appetite. The pair was 5 pips shy from touching the $1.40 mark for the first time since February 2016.

As a commodity currency, the Canadian dollar is strongly correlated to crude oil prices. Given that the oil prices trade at multi-year lows, the CAD followed. Although there was a pullback in the USD/CAD price today, it was still a very positive week for the pair.

USD/CAD daily chart (TradingView)

Moreover, a strong bounce in stocks has also helped the CAD to bounce back today. As a result, we may see a retest of the previous resistance, now support, below the $1.37 mark next week. On the upside, the $1.40 remains the main target for the bulls.

Summary

Bank of Canada (BoC) made another emergency cut by 50 basis points to its key interest rate today in a bid to help the struggling economy amid the coronavirus outbreak. In the meantime, the USD/CAD hit a new 4-year high near the $1.40 mark.

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