USD/CAD remains depressed below 1.3800 amid higher hopes of Fed cuts
- The Dollar attempts to pick up against the CAD, but remains below 1.3800, near two-week lows.
- Higher hopes of Fed cuts are keeping US Dollar's upside attempts limited.
- FX volatility remains subdued, ahead of the US PCE Prices Index and Canada's GDP data, due on Friday.
The US Dollar has ticked up from two-week lows below 1.3770 against the Canadian Dollar on Thursday, but remains capped below the 1.3800 level, after depreciating 0.5% over the two previous days, wth investors ramping up bets for Fed cuts.
New York Fed President John Williams further fueled these hopes, affirming that the Fed’s policy is still at restrictive levels and stating that every meeting is “live” for him. Hopes of a Fed cut in September have increased to 87%, up from 75% last week.
The Greenback is also suffering from the escalation of Trump’s attacks on the Fed. His attempt to fire Governor Cook has been seen as a move to shift the committee’s consensus to the dovish side, which, on the one hand, boosts hopes of a faster easing cycle and, on the other, erodes investors' confidence in the central bank, with negative consequences for the US Dollar in any case.
In the absence of relevant macroeconomic releases, a mild pickup in Oil prices is providing some support to the CAD, as crude is Canada's main export. Currency volatility, however, remains subdued on Thursday, with investors awaiting the US PCE Prices Index figures and Canada’s Gross Domestic Product figures.
The Canadian Economy is expected to have contracted at a 0.6% annualised rate in the second quarter, following a 2.2% advance in the first three months of the year. These figures would add pressure on the BoC to ease its monetary policy further, and might provide some support to the US Dollar.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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