The G7 conference call turned out to be a sideshow to the Federal Reserve’s decision to lower interest rates by 50bp. This unexpected move was the first intermeeting cut since the global financial crisis. While the G7 discussion probably contributed to their decision to ease, the timing, which was just over 2 hours from the release of the G7 statement, was a complete surprise.

Its become very clear that central bankers are worried not only about the economic impact of COVID-19 but also the losses in the stock market. According to Federal Reserve Chairman Powell who held a press conference to clarify the decision, the coronavirus outbreak disrupted economies in many countries and these measures will weigh on activity for some time. The magnitude and persistence of the impact is uncertain but the risks to their outlook changed enough to justify a move to support the economy. He added that there will be more action by each G7 nation along with the possibility of formal coordination. In other words, more easing is on the way from other central banks including the Fed if the sell-off in stocks deepens and the global slowdown worsens.

The U.S. dollar tanked in response, selling off sharply against euro, the Japanese yen and other major currencies. This move is in sync with expectations because the Fed’s action was an aggressive one that immediately reduced the dollar’s yield advantage over other currencies. The sell-off in stocks on the other hand may be more difficult to comprehend. When the announcement was first made, stocks soared in relief but by the end of the NY session, the Dow Jones Industrial Average dropped more than -800 points.

The problem for the Fed and other central bankers is that rate cuts cannot solve a health crisis. While the Fed may have hoped that easing early and aggressively would reassure investors, it did the complete opposite by highlighting the extent of the central bank’s concern. Investors expect another move in April and some do not rule out a further quarter point cut on March 18. For now, though, the real question is whose next.

Last night, the Reserve Bank of Australia lowered interest rates by 25bp. Unlike the Fed, they opted for a less aggressive move because they felt it was too early to say how persistent virus effects will be. With that said, the RBA admitted that the impact on the economy thus far is significant with March quarterly GDP growth likely to be noticeably weaker. They are prepared to ease further if needed.

The Bank of Canada has a monetary policy announcement on Wednesday. As shown in the table below, data hasn’t been terrible but the market has completely discounted a quarter point cut. It will be interesting to see if Governor Poloz, who has been strictly committed to data obliges. Oil prices have fallen sharply and equity values are eroding. It would be a mistake for the central bank to ignore all the risks that are piling up. At most, we expect a quarter point move by the BoC, accompanied by the same commitment to do more if needed.

The Bank of Japan and Bank of England have made it clear that they are ready to increase stimulus but we haven’t heard much from the European Central Bank. Traders are pricing in 90% chance of a rate cut that would bring rates deeper into negatively territory. They don’t have much room to move (which explains part of the euro’s strength) but they won’t be standing on the sidelines either letting others do all the work. Given the market’s reaction to the Federal Reserve’s move, more losses are likely for U.S. equities and the U.S. dollar. Watch for USD/JPY to break 107 in the Asia session.

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