USD/CAD: Bulls take a rest bite as risk-on flows dominate

• USD/CAD slightly lower on improved risk sentiment as US dollar lets out some safe haven air.
• The sentiment that the coronavirus is a temporary blip is enabling risk appetite to return to markets, supportive of the commodity complex. 

USD/CAD is currently trading at 1.3240, having travelled between a range of 1.3235 and 1.3295, and is -0.34% at the time of writing. The mood is risk-on and investors are moving into riskier assets. US yields are higher, stocks are climbing and the commodity complex is starting to make a comeback, (GRB index +1.23%, extending the Feb' recovery), all supportive of the loonie.

Coronavirus headlines in the driving seat

USD/CAD trades slightly lower with no top tier data releases today, so the markets are being driven by the coronavirus developments still. This week has been more positive this that vein following China announcing that the number of new cases confirmed inside the country had declined for two days in a row. This has cushioned investor risk appetite and the cautious optimism has also been echoed by top global central bankers in recent statements, following the lead from Reserve Bank of Australia's governor, Phillip Lowe, who said: “If the number of cases stabilises we could see a bounce-back.” 

Most recently, Reserve Bank of New Zealand's governor, Adrian Orr, in yesterday's interest rate decision, said the "overall impact of coronavirus on New Zealand will be of short duration". Then, in the UK, Mark Carney, the Bank of England governor, told lawmakers that while it was too early to assess the impact of the coronavirus outbreak on global growth, that it had not yet led to any tightening in financial conditions and UK banks were in a position to withstand a much bigger shock to China’s economy. The Federal Reserve's chair, Jerome Powell, however, was sounding somewhat more cautious when he said, “risks to the outlook remain. In particular, we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy.”

Indeed, the hopes that we have reached 'peak coronavirus' fear is catalyzing a round of risk-on trading and the DXY has taken a breather just shy of 99. Markets are now looking ahead to the US data in Consumer Price Index and Retails Sales. Analysts at TD Securities argued that, overall, CPI presents no threat to the USD maintaining its high altitude.

Bank of Canada in focus

The central bank recently held rates steady but there is still around a 50% chance of a 25bp cut pencilled in by the end of 2020, according to analysts at Rabobank. "We remain of our long-held (since the 2019 H1) view that the BoC will begin easing rates in 2020 Q2," the analysts said.

"Our projected easing path for 2020 (three 25bp cuts) is predicated on RaboResearch’s expectation that the Fed will begin easing in April and continue to 0%.The big question mark for Canadian activity remains consumption. In 2020, we still expect soft investment and trade, and we do see a softer consumer sector igniting the BoC’s easing bias. USD/CAD is likely to remain somewhat range-bound with a stronger CAD than in 2019 with our bias for USD/CAD to trade a 1.30-1.32 in the first half of this year."

USD/CAD levels