USD/CAD nears three-week highs at 1.3750 as the US Dollar rallies on risk aversion
- The US Dollar extends gains on risk-averse markets amid rising rumours about Fed Powell’s resignation.
- Anxiety about Trump’s tariffs is also weighing on the CAD as the August 1 deadline approaches.
- The depressed Oil prices pose additional headwinds on the Loonie.
The US Dollar is retracing previous losses against the Canadian Dollar on Thursday, with markets averse to risk amid rising speculation that Fed Chairman Jerome Powell will be forced to resign under pressure from US President Trump.
Trump said that the possibility of firing the Fed chairman is “highly unlikely,” but he admitted to having discussed the possibility with Republican policymakers before stating that he would like him to resign.
Shortly afterwards, he mentioned the possibility of ousting him on fraud charges related to a USD 2.5 billion renovation plan for the central bank’s headquarters, which left investors wondering about the future of the Fed chief.
The unprecedented standoff between a US President and the Fed chairman has boosted risk aversion, so far supporting the safe-haven US Dollar.
Beyond that, US Producer Prices Index data revealed that inflationary pressures at factory gates stalled in May, while the yearly inflation moderated to 2.3% from May’s 2.6%. These figures soothed fears of another inflationary cycle, triggered by Tuesday’s CPI data.
The Canadian Dollar remains on the back foot after Trump set a 35% tariff on Canadian imports, which adds to a 50% levy on Steel and aluminium, while the negotiations for a better deal seem stalled.
Beyond that, Crude prices, Canada’s main export, remain depressed close to the $65.00 level, 3.5% down on the week and more than 15% below late June highs, which adds negative pressure on the CAD.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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