Bank of Canada follows the Federal Reserve (Afternoon analysis 4.03.2020)

Positive market sentiment continues to dominate after central banks cuts. The Bank of Canada joins this group, reducing rates by 50 basis points. By contrast, interest rates in Poland remain unchanged, and inflation in 2020 is expected to be significantly higher than expected in November.

Data from the US can support positive sentiment

In the context of yesterday's interest rate cuts in the USA, the Mortgage Bank Association (MBA) published an interesting piece of information today. The number of refinanced mortgage contracts increased by 26% per week and 224% per year at the end of February 28. This strong increase occurred even before the interest rates were cut by 50 bps in the USA, which may suggest that another wave of refinanced contracts will be observed in the following weeks. This is one of the channels for the Federal Reserve to make a positive impact on economic growth. It may also keep consumption among Americans at a relatively high level, taking a correction for the coronavirus threat that may limit it.

ISM also provided positive information for the US economy in the afternoon: PMI activity in the services sector rose to 57.3 points in February, significantly exceeding expectations (54.8 points) and rising to its highest level in a year. This may reduce concerns about the impact of coronavirus on the US economy, especially after weak data for the industry. The ADP research institute reported that the number of new payrolls in February rose by 183k, i.e. 13k above expectations (although the high January increase was revised downward). As a result, this may support the already prevailing positive sentiment on the broader market since Friday.

This afternoon, the Bank of Canada has lowered the main interest rate by 50 bps (to 1.25%), above expectations at 25 bps. The Canadian head office bankers may have been reluctant to cut rates this deep, given the overheating in the real estate market, but the move by the Federal Reserve the day before might have convinced them of the rightness of this decision. In a statement to the decision, the Bank of Canada indicated that it "is ready to change monetary policy if necessary." This increases the pressure on the European Central Bank (ECB) to provide monetary stimulation. Even before the decision on interest rates in Canada was known, the market fully valued the further cut in the ECB reference rate by 10 basis points.

Polish MPC: Here, no change

At 4:00 p.m., the Monetary Policy Council issued an announcement on interest rates in Poland (earlier the Council stated that it left the rates unchanged at 1.50%). It included new data on inflation and GDP growth pace from the March projection. With a 50% probability, inflation in 2020 will be in the 3.1-4.2% range, a significant increase compared to the 2.1-3.6% range in the November projection. Inflation going beyond the range is most likely to hamper the MPC's intentions to cut its rates. On the other hand, interest rate cuts by all major central banks and a potential shock to both demand and supply may eventually push the Council to reduce rates, depending on developments abroad and in Poland.

The positive sentiment in the equity market, supported by the actions of central banks, combined with maintaining rates in Poland at an unchanged level (and a slightly higher level of inflation in the new projection) strengthened the zloty somewhat. The EUR/PLN exchange rate was below 4.29, i.e. at the lower boundary since February 24. The globally stronger dollar today (the EUR/USD exchange rate moved away from the 1.12 limit and was trading at around 1.1100-1.11250 in the afternoon) meant that the zloty did not gain in relation to the US currency. The USD/PLN exchange rate stabilized in the range of approx. 3.85-3.86.

This week, Friday's report on the US labour market will be important for the currency market, although in the context of the activities of the central banks of the world's largest economies, these data may have a slightly smaller impact on the currency market than usual.

Tomorrow's preview

At 2:30 p.m., the US Department of Labor will publish a weekly report on the number of initial jobless claims. The median of expectations points to 215k last week, and although these are usually secondary data in terms of their impact on the dollar, they may determine the condition of the labour market. Especially now, when concerns about the impact of the coronavirus on the economy appear in the US. Although these data are not expected to cause significant currency fluctuations tomorrow, the readings may catch the eye in the following weeks, as investors may look for the first signs of weakness in the labour market, among others in these data.