BoC’s Gravelle: Ready to act under severe market-wide stress

Bank of Canada’s Deputy Governor Toni Gravelle said on Wednesday that the BOC is ready to act in the case of severe market-wide stress and provide liquidity support to the financial system.

The USD/CAD pair was last seen losing 0.15% on the day at 1.3580 and showed no reaction to these comments. At the time of writing, the USD/CAD pair is trading at 1.3565. The Canadian Dollar has extended its gains against the US counterpart for three straight days, spurred by a risk-on impulse and overall US Dollar weakness. The buck is pressured on expectations for a less hawkish US Federal Reserve (Fed). The USD/CAD is trading at 1.3569 after printing a high of 1.3616.

The USD/CAD pair continued its fall on higher oil prices as Western Texas Intermediate (WTI) rose more than 6% weekly. Canada is one of the world’s major crude oil and natural gas exporters. Therefore, higher energy prices usually underpin the Canadian Dollar.

Additionally, a softer US Dollar gave another leg-down to the USD/CAD pair as it’s falling to a three-week low. However, the US Dollar Index (DXY), a barometer for the greenback’s value vs. a basket of six currencies, has paired some of its losses, gains 0.23%, at 102.665.

Traders should be aware that the Canadian Dollar, as a risk-perceived currency, would be subject to weakening on geopolitical tensions rise or sentiment shifts. As long as investors’ mood remains upbeat, the USD/CAD has room for another leg down and it might test the 100-day Exponential Moving Average (EMA) at 1.3520.

Additional Quotes

“Quantitative tightening program will likely end sometime around the end of 2024 or first half of 2025; QT is working but will take some time to run its course.”

“If faced with extreme event that caused severe dysfunction in government of Canada (GoC) bond market, bank could resort to large-scale GoC bond purchases.”

“Bar is very high for bank to use large-scale GoC bond purchases to support market functioning again.”

“Bank would only be offering extraordinary liquidity in extreme market-wide situations, when entire financial system faced funding constraints.”

“Penalty pricing should be built into extraordinary actions whenever possible to make program unattractive once financial conditions improve.”

“If bank were faced with a UK-style pension fund crisis, it could use its contingent term repo facility; this would reduce need for bank to conduct outright bond purchases.”

“This level is well below current level of roughly C$200 bln; our best estimate is somewhere in the range of C$20 bln to C$60 bln.”

“Canadian banks are not immune to spillover from events elsewhere, which can negatively affect things here.”