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Canadian Dollar Weakens As BoC Imposes Emergency Interest Rate Cut

March 27, 2020 at 16:37 by Andrew Moran

An assortment of CAD billsThe Canadian dollar is weakening against many currency rivals to finish out the trading week. Following a week of modest gains, the loonie is falling on the central bank announcing an emergency cut to interest rates as the economy gets battered by coronavirus outbreak and tumbling energy prices.

For the second time in less than a month, the Bank of Canada (BoC) made an unscheduled reduction to its benchmark interest rate in response to the COVID-19 pandemic. The central bank lowered its overnight lending rate – what financial institutions charge for short-term loans between retail banks – to 0.25%. Before the rate cut, the BoC maintained the highest rate in the developed world with 0.75%.

The purpose of its monetary easing is to encourage spending, lending, borrowing, and investing, though the BoC had been warning for years about ballooning household debt.

The bank said in a news release on Friday:

The pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy. The intent of our decision today is to support the financial system in its central role of providing credit in the economy, and to lay the foundation for the economy’s return to normalcy.

In addition to a rate cut, the BoC is scooping up commercial and government debt, too. The central bank launched the Commercial Paper Purchasing Program. This will involve two measures: buying commercial paper from businesses to ensure they meet their financial needs and acquiring government debt to the tune of $5 billion a week.

Governor Stephen Poloz assured everyone that the bank is using any and all tools at its disposal to stabilize the national economy, noting that “a firefighter has never been criticized for using too much water.”

Canada is also facing economic fallout from slumping energy prices. May West Texas Intermediate (WTI) crude oil futures plummeted $1.28, or 5.66%, to $21.36 per barrel on the New York Mercantile Exchange. June Brent crude futures shed $1.36, or 4.75%, to $27.29 a barrel on London’s ICE Futures exchange. Oil is poised for its fifth consecutive weekly decline. Natural gas is trading relatively flat at $1.68 per million British thermal units (btu).

Since energy remains Canada’s primary export, any significant price change in oil and gas can have a severe impact on the Great White North. Oil has become so inexpensive that it is cheaper to ship crude than to buy.

The USD/CAD currency pair rose 0.31% to 1.4064, from an opening of 1.4021, at 16:29 GMT on Friday. The EUR/CAD climbed 0.73% to 1.5579, from an opening of 1.5465.

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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