[Market Review
The Bank of Canada scaled back QE. last night, the Bank of Canada announced its interest rate resolution, leaving the benchmark rate unchanged at 0.25%, in line with market expectations. Combing found that the resolution has two major points. The Bank of Canada reduced the size of its asset purchase program to C$3 billion per week, compared to C$4 billion per week previously. Second, the central bank’s interest rate hike timing expectations, from 2023 to the second half of 2022 ahead of schedule.
In a subsequent press conference, Governor McCollum said real estate and business have shown impressive resilience. If the forecast is correct, the Bank of Canada may ease quantitative easing further. He also said that the third wave of the epidemic has introduced new uncertainties. Further adjustments to the quantitative easing program will be gradual.
The dollar plunged nearly 200 points against the Canadian dollar in the short term as a result of the interest rate resolution. Arguably, Canada is the first major economy to withdraw its emergency monetary stimulus measures. Some analysts even said that the Bank of Canada’s new tendency to tighten monetary policy may signal that other central banks will also make changes.
The dollar declines unchanged. Next, let’s focus on the dollar index. Earlier in the day, the U.S. index climbed to near 91.4 at one point. The epidemic backlash in India and Japan led to widespread weakness in stock markets, boosting the dollar’s safe-haven appeal. However, the U.S. index retreated after the Bank of Canada’s aforementioned announcement, falling back near the 91 mark.
Wednesday’s big drop in the dollar against the Canadian dollar was a reminder of that. It is the outlook for interest rate changes that is key to the currency’s movement as the recovery advances. Some analysts say the dollar will continue to weaken through much of April as U.S. interest rates remain low and traders bet that vaccinations will kick off a stronger global recovery and drive demand for riskier, higher-yielding currencies.
Gold rose above $1,790. Pressure on the dollar, combined with weakness in U.S. bond yields, kept gold higher, with gold prices breaking above the $1,790 barrier during the day, hitting a high of $1,797.56.
Silver oscillated higher. Like gold, silver had a good day of gains. Silver prices climbed from $25.70 all the way up to around $26.50.
The euro fell and then rose. Non-U.S. currencies generally maintained the opposite trend with the dollar. Among them, the euro once fell below the 1.20 mark against the dollar. However, the CBC interest rate resolution also boosted the euro a, the euro against the dollar then returned to 1.2040 near.
The British pound narrowly oscillated. Similar to the trend of the euro, the pound is also down and then up during the day, the overall oscillation around 1.3940.
U.S. oil extended its downtrend. Finally, let’s focus on the oil market. U.S. oil oscillated downward during the day and is currently hovering around $61. U.S. crude oil inventories unexpectedly increased. Meanwhile, there are concerns that a surge in the number of new cases in India and Japan will hit crude oil demand. In addition, the U.S.-Iraq negotiation process has helped oil prices fall. For now, we can focus on next week’s OPEC meeting.
[Risk Warning].
Gold: recent positive factors highlighting not recommended to short gold
Singapore OCBC Bank maintains a neutral view on precious metals in the short term. The decline in U.S. bond yields and U.S. indices has supported gold prices. In this context, it is not recommended to short gold. However, the bank expects that in the long term, U.S. bond yields may rise again, and gold prices may be under pressure as a result.
Crude oil: Crude oil is expected to soften in the short term, focusing on the low of $57
Recently, crude oil has fallen to some extent due to factors such as U.S.-Iraq negotiations and OPEC or litigation. Some analysts say that the time is ripe for U.S. oil to soften. The U.S. stock market has run out of steam and cannot continue to make new highs. And bearish sentiment is likely to keep weighing on oil prices for the rest of the week. In the short term, U.S. oil could fall to the lows seen late last month near $57. However, the analysis also noted that the outlook for the second half of the original price remains very positive.
Australian dollar: Australia and the United States is expected to resume the trend of gains in the middle of the year or back to 0.80
National Australia Bank maintains a bullish view on the Australian dollar in the coming months. The two key factors that have affected the volatility of the Australian dollar recently are risk sentiment and commodity prices. Both have been supporting the recent rise in the Australian dollar.
In addition, with Chinese commodity demand remaining strong, one can optimistically expect the global economy to fully reopen in the second half of this year. And from a dollar perspective, the greenback has pulled back this month and there is the potential for further pullbacks. Therefore, the bank believes that AUDUSD will recover to 0.80 level around the middle of the year, and may move moderately higher to 0.80-0.85 in the second half of the year.
[Key Outlook].
19:45 ECB announces interest rate resolution: hard to expect big moves
The ECB said in March that it would accelerate its bond purchases to suppress bond yields, support the fledgling recovery and hold down the government’s borrowing costs. The bank publishes its weekly acquisitions every Monday, and it is hardly likely to increase them.
Yields are still low, which is helping the government raise money to support the recovery. 10-year Italian bonds are returning around 0.80%, about half the rate of U.S. Treasuries of the same maturity. German government bonds are yielding well below zero. In this scenario, the ECB will likely continue to buy bonds at a slow pace, printing fewer euros as the economy continues to recover.
On the vaccine front, the pace of vaccination in Europe has accelerated considerably. About one in five residents has been vaccinated and the pace of vaccine distribution will accelerate in the coming months. The EU recently announced an additional 50 million doses of Pfizer vaccine delivered to Europe in the second quarter. In addition, regulators may give the green light to Johnson & Johnson vaccine injections. The growing prospect of a way out of the crisis may be reflected in the bank’s rhetoric.
As the pace of vaccinations accelerates, the economy is picking up. Despite the fact that some economies remain in lockdown and the number of infections from the outbreak remains high, companies remain optimistic. The German ZEW economic sentiment, Sentix investor confidence and Markit purchasing managers’ index have been rising and surprisingly so in recent months. To make a forward-looking assessment, the ECB considers these measures of future economic activity, which could also affect their optimistic outlook.
While the economy is improving, some analysts expect the central bank to start tapering sometime in the second half of 2021. But Lagarde has said that the economy is still deeply affected by the epidemic, refuting the idea of “tapering emergency bond purchases from as early as July” and claiming that it will continue to maintain favorable financing conditions. Therefore, we expect the ECB to reiterate that it will maintain favorable financing conditions and that the central bank will not make any unexpected moves.
While there will not be many surprises at this meeting, ECB policymakers are beginning to disagree on the next course of action. In the short term, this disagreement stems from differing assessments of the economy’s continued rebound. Some point out that the situation will improve in the coming months as Europe progresses on the new crown vaccine. Yet others point out that Europe’s growth is lagging behind the rest of the world. At stake is not only the ECB’s response to the outbreak, but also the control of monetary policy following the recovery.
20:30 ECB President Lagarde holds a conference: expected to maintain a dovish stance
Next. Take a look at ECB President Lagarde’s upcoming speech. While the clouds around the epidemic are starting to dissipate, investors trying to predict the ECB’s stimulus program will face greater uncertainty.
Discussions about how the ECB will exit its stimulus program will coincide with a possible change in inflation targeting later this year. This will leave market participants uncertain as to what monetary support ECB officials, will provide and how far the ECB will tolerate inflation to rise as the economy recovers from the recession.
The risk is that this unpredictability increases the volatility of borrowing costs and could derail the recovery. Investors can watch out for clues from Lagarde on whether she will reveal anything relevant.
She may maintain a dovish stance. Lagarde warned at an event last Wednesday that the eurozone economy is still supported by monetary and fiscal stimulus, two “crutches” that cannot be withdrawn unless the economy fully recovers. Lagarde will probably reiterate that the ECB will maintain good financing conditions, inflation may be higher in the short term, will not be prematurely scaled down bond purchases.
Several ECB policy makers have supported Lagarde, but two of the management committee have called for the scale of bond purchases to be scaled back later this year, indicating that there are divisions within the ECB.
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