USD/CAD Loonie Lower After China Rate Cut

PBoC Reserve Requirement Ratio Cut Boosts USD

The ongoing downward spiral in the Chinese stock market finally pushed the People’s Bank of China (PBoC) into action. After Friday, August 21 the Shanghai index had lost over 11% that week. Much was expected from the Chinese central bank and investors were disappointed with the announcement over the weekend that Pension Plans would be allowed to invest up to 30% of their funds in the stock market. The lack of action from the PBoC triggered a fear storm that ended up dragging global bourses into negative territory. The negative results continued into Tuesday when after Asian market close the Chinese central bank to announce a much awaited stimulus measure to stop the sell off of assets.

The USD was caught in the cross fire as the fear that gripped investors triggered by China made the probability of a Federal Reserve rate hike even lower. The big dollar was sold across the board as other currencies: the Japanese yen, British pound and the Euro were chosen as safe haven destinations to shield them from the stock market rout. Oil was also hit as Chinese demand was forecasted lower as panic continued to build up.

The announcement of the lower Reserve Requirement Ratio and an interest rate cut by the PBoC jump started European and American stock markets along with the USD.

The USD/CAD broke below 1.32 on Monday as the American dollar was losing traction to other currencies. The Chinese announcement reversed the fate of the Loonie which gave all gains back in the following hours. The currency pair is trading above 1.3321 and even with slightly higher oil prices the CAD hasn’t been able to hold off the advance of the USD.

The Canadian economic is light this week and that will give the Loonie no arguments against the USD. The greenback will be affected by the release of the durable goods orders on Wednesday, August 26 and the second report on U.S. GDP on Thursday. After a rocky start of the week for the global markets investors will look to Wyoming for answers from top central bankers and monetary policy mavens as they meet for the annual Jackson Hole Wyoming.

The probability of a September rate hike by the Federal Reserve took a hit this week and it would take impressive numbers from the economy to convince the market that the Fed will finally pull the trigger. Interest rate divergence has been the main driver of USD strength and anything to raises doubts about the expected liftoff this year will lower the currency versus majors.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza