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Canadian Dollar Surges As BoC Announces Surprise 50-Basis-Point Cut

March 13, 2020 at 19:19 by Andrew Moran

An assortment of CAD billsThe Canadian dollar is rallying to close out the trading week after the Bank of Canada (BoC) announced a surprise 50-basis-point cut to interest rates. This comes one week after the central bank imposed a 0.5% reduction that mirrored the Federal Reserve’s recent emergency action. The BoC confirmed that it is not done, signaling that it is ready to do more if it is necessary.

BoC head Stephen Poloz lowered the overnight rate to 0.75%, noting that this is a “proactive measure” for the national economy to absorb the economic fallout from the coronavirus that has crippled the global economy. The central bank said in a statement that it might not be done easing.

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. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.

Last week, Poloz told the press that Canada’s economic resilience would be tested by Covid-19.

On Thursday, the BoC outlined new stimulus measures aimed at pumping liquidity into the system to stabilize financial markets. It plans to extend its bond buyback program across all benchmark maturity sectors, giving dealers the option of swapping old bonds with new ones. The purchases would be executed quarterly and for only 30-year notes.

The BoC plans to complete its first repurchasing operation on Monday for a total of $500 million in the 30-year sector. On Tuesday, it will also add new term repo operations with terms of six and 12 months bi-weekly to the tune of $7 billion. The central bank noted that its regular one- and three-month term repo operations will stay the same, but their size, term, and frequency could be adjusted depending on the economy. This operation could be upward of $6 billion.

Canada’s decision came shortly after the Fed revealed that it would pump more than $1 trillion into the system for overnight lending and to acquire more Treasurys.

The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the functioning of the Canadian financial system.

The federal government advised citizens against non-essential foreign travel and promised financial assistance for Canadians. Finance Minister Bill Morneau is scheduled to release Ottawa’s plans next week. Prime Minister Justin Trudeau, whose wife, Sophie, tested positive for the coronavirus, hinted at some type of fiscal stimulus in recent remarks.

The USD/CAD currency pair tumbled 0.22% to 1.3895, from an opening of 1.3924, at 19:10 GMT. The EUR/CAD fell 1.21% to 1.5386, from an opening of 1.5576.

If you have any questions, comments, or opinions regarding the Canadian Dollar, feel free to post them using the commentary form below.

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