FX Daily: Bank of Canada on hold, but may expand QE

The Bank of Canada is likely to keep rates unchanged at 0.25% today. However, markets are expecting the Bank to expand its asset purchase scheme.

Source: Bank of Canada

USD: Markets giving the benefit of the doubt

Markets have largely looked through the IMF downgrade to the world economic outlook and its warning that this will be the worst economic crisis since the 1930s. Plenty of bad news has already been priced in, while on the positive side, the bazooka the Federal Reserve unleashed (unlimited quantitative easing and now, plans to start buying commercial paper) is providing equity markets some cushion and some benefit of doubt. Coupled with the unfolding USD weakness (as the Fed took away the dollar yield advantage and is expanding its balance sheet aggressively), we see a stabilization in emerging markets and commodity FX. For EM FX, given the still uncertain global economic outlook and our preference for low yielders in the G10 FX space (ie, euro and yen), by extension this makes central and eastern European FX stand out vs USD given the low yielding nature of CEE currencies (yet relatively solid credit quality) as well as regional currencies benefiting from higher EUR/USD.

EUR: BTP buying from the ECB allowing for higher EUR/USD

Despite renewed widening of the BTP-Bund spread and concerns about the Italian fiscal outlook, the impact on EUR remains limited as the ECB is providing a backstop to BTPs, in turn allowing for higher EUR/USD given the broader USD weakness. Indeed, both the European Central Bank and the Swiss National Bank appear to be currently doing their bit to hold the euro project together, with the ECB buying BTPs and the SNB buying EUR.

SEK: Inflation set to dip to the lowest level since early 2016

Swedish March headline CPI is set to dip to the lowest level since early 2016. But this is unlikely to lead to an imminent response from the Riksbank, with the central bank likely putting a larger focus on the Covid-19 related hit to the economy. We continue to see the bar for bringing rates back into negative territory as rather high, with the Riksbank likely focusing on the liquidity measures. But as all global central banks are engaging in large scale easing, potentially looser policy from the Riksbank would be unlikely to hurt SEK too much this time round. Hence, the EUR/SEK's response to March CPI should be limited today.

CAD: The BoC on hold, but may expand QE

The Bank of Canada is set to keep rates unchanged at 0.25% today, as Governor Stephen Poloz has more than once suggested this is the lower bound for rates. However, markets have likely built some expectations that the Bank will expand its asset purchase scheme, both in size and in qualitative terms. The BoC may start to buy provincial bonds to close the ballooning spreads with the Federal bonds and possibly (although less likely in our view) consider Fed-like corporate debt purchases. Another dovish BoC step/message today should put a floor below USD/CAD for now and force the loonie to keep trailing its procyclical peers.