Among the few beneficiaries of the global coronavirus outbreak has been the U.S. dollar, which reached a three-year high early this week as investors fled from turbulent equity markets to park their investments in safer havens such as the greenback.
Global markets plunged early this week on news that the virus had spread beyond China, specifically to Italy, Iran and South Korea, with all three countries reporting a rapid surge in infections over the weekend.
The U.S. Dollar Index, a measure of the strength of the dollar against a basket of major currencies including the euro, Japanese yen and the Canadian dollar, has risen more than three per cent in the past three weeks, the biggest short-term leap in over a year.
“Concerns about the coronavirus are supporting the demand for safe-haven assets, and the U.S. dollar is reaping the benefit,” wrote François Dupuis, chief economist at Desjardins Capital Markets in a recent note. “The fact that the U.S. economy appears to be in better shape than most other economies is also helping the greenback,” he added.
The greenback has also risen two cents against the Canadian dollar in the last month. The loonie was in the 77 cents U.S. mark in early January, but fell to 75 cents U.S. a month later, before picking back up, which Dupuis called “surprising” given the rail blockades and the increasing level of short-term risk to the Canadian economy.
“That said, rising prices for some commodities, including gold, appear to have had a positive impact for the loonie,” he wrote.
The price of oil, one of Canada’s major exports, fell as concerns about the spread of the coronavirus and its impact on oil demand outweighed OPEC output cuts and Libyan supply losses. U.S. crude oil futures were down 0.5 per cent at US$51.18 a barrel.
The Canadian dollar rose against the greenback on Tuesday, clawing back some of the prior day’s losses. Investors will also be paying close attention today to Bank of Canada Deputy Governor Timothy Lane when he gives a speech in Montreal, primarily focused on the future of money.
Chances of an interest rate cut as soon as next week have climbed to nearly 30 per cent from about 10 per cent last Wednesday as the coronavirus spread outside of China, a Reuters survey shows. Last month, the bank opened the door to a rate cut should a recent slowdown in domestic growth persist. The bank is scheduled to make an interest rate announcement on March 4.
Some economists have warned that a potential pandemic could see the Bank of Canada, and the U.S. Fed lowering interest rates, if the virus raised the likelihood of “sustained economy slowing.”
“Any future easing from the Bank of Canada can now, in theory, be considered “insurance” in nature given the rising probability that the Governing Council are likely to want to now insure against an adverse global spillover from the virus,” wrote Ian Pollick, head of north American rates strategy for CIBC Capital Markets.
“Not only does that reduce the depth of any mini-cycle, but, in doing so, it potentially reinforces Canada’s underperformance versus U.S. rates,” he added.
With a file from Thomson Reuters
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