USD/CAD is pushing against multi.month highs at 1.3880
- USD/CAD has rallied to test three-week highs at 1.3880 amid generalised US Dollar strength
- A sourer market sentiment and caution ahead of Fed Powell's speech on Friday are underpinning support for the USD.
- The Loonie struggles amid higher hopes of BoC cuts and depressed Oil prices.
The US Dollar extends gains against its Canadian Counterpart on Wednesday, with price action pushing against the 1.3880 level, where the pair was capped on August 1. Intra-day charts show some hesitation at current levels, but technical indicators are pointing higher, suggesting the possibility of further appreciation.
The US Dollar is trading higher across the board on Wednesday in risk-averse markets following a sell-off on Wall Street on Tuesday, which sent US treasury yields higher while the Kremlin cooled hopes of an imminent peace deal in Ukraine.
Markets hold their breath with Fed Powell in focus
Beyond that, investors have shifted their focus to Fed Chairman Powell's speech at Jackson Hole on Friday. A context of a weakening labour market and hotter inflation –especially producer prices– poses a serious challenge for the bank. In this context, the risk is that a hawkish Powell prioritises inflation above employment and crushes investors’ hopes of a September rate cut.
In Canada, CPI figures released on Tuesday showed a moderating inflationary pressure in July, paving the way for the Bank of Canada to resume its monetary easing cycle.
Canada’s headline CPI slowed down to a 1.7% yearly rate, from 1.9% in the previous month, and the key BoC CPI eased to 2.6% from 2.7%. The soft inflation and the depressed Oil prices, which remain near two-month lows right above $62.00, are weighing heavily on the Loonie.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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