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Canadian dollar, bond yields slide as BoC broadens quantitative easing

TORONTO (Reuters) - The Canadian dollar slumped to a one-week low on Wednesday and domestic bond yields tumbled as the Bank of Canada added to the suite of assets it is purchasing to cushion the economic blow of the coronavirus pandemic.

FILE PHOTO: A Canadian dollar coin, commonly known as the "Loonie", is pictured in this illustration picture taken in Toronto, January 23, 2015. REUTERS/Mark Blinch

Canada’s central bank kept interest rates steady at 0.25% as expected and added provincial and corporate bonds to its asset-purchase, or quantitative easing, program.

“There has been some improvement in market functioning. But important strains continue, and Governing Council acknowledged that near-term borrowing requirements of governments and the private sector are likely to pose further challenges,” said Bank of Canada Governor Stephen Poloz, who is due to step down in June.

Since the start of March, the BoC has slashed interest rates by a total of 150 basis points, in a series of emergency moves, and begun buying at least C$5 billion of government bonds per week, while Ottawa is rolling out more than C$200 billion of fiscal support.

“The BoC and the government continue to deploy the proverbial policy bazooka to support the economy, with assurances that more will be added if needed,” said Ryan Brecht, a senior economist at Action Economics.

Canada’s economy shrank a record 9% in March from the previous month as the coronavirus outbreak forced the shutdown of economic activity during the month, Statistics Canada said in a flash estimate.

“The goal has to be to provide a cushion for businesses to bridge the gap until the economy can be reopened,” said Greg Taylor, a portfolio manager at Purpose Investments.

Canadian government bond yields fell across a flatter curve, with the 10-year down 11.8 basis points at 0.640%.

Yields on Canadian provincial bonds fell by even more, with the oil-producing province of Alberta seeing its 10-year borrowing cost tumble by about 30 basis points to 1.758%.

The Canadian dollar CAD=D4 was trading 1.5% lower at 1.4090 to the greenback, or 70.97 U.S. cents, its biggest decline since March 18. The currency touched its weakest intraday level since April 7 at 1.4130.

The Toronto Stock Exchange's S&P/TSX composite index .GSPTSE closed down 2.1% at 13,958.58, pulling back from a one-month high on Tuesday. The heavily weighted financial sector fell 3.4%, while the energy group was down 5.3%.

“Until oil regains its footing, Canada could underperform (U.S. markets),” Taylor said.

U.S. crude oil futures CLc1 settled 1.2% lower at $19.87 a barrel after the United States reported the biggest weekly build ever in inventories.

Reporting by Fergal Smith; Editing by Bernadette Baum and Peter Cooney

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