USD/CAD pulls back, nearing 1.3830 with central banks on focus
- The US Dollar pares previous losses but remains within previous ranges, above 1.3830.
- The Dollar is trading moderately lower, amid hopes of a dovish turn by the Fed.
- The CAD seems unlikely to rally with the market anticipating a BoC rate cut on Wednesday.
The US Dollar is trading moderately lower on Monday, but still trading within Friday’s range above 1,3830. The downbeat US consumer confidence data released on Friday added bearish pressure on the USD, but investors are wary of shorting the Greenback ahead of Wednesday’s Fed decision.
The Consumer Sentiment Index released by the University of Michigan revealed that US consumers have grown more cautious amid the higher prices, adding to evidence that the impact of Trump’s tariffs is starting to pinch the US economy.
September’s Consumer Confidence Index fell to 55.4, its weakest reading since May, from 58.2 in August, and well below the 58.0 reading forecasted by market analysts. Beyond that, inflation expectations for the year remained steady while the long-term inflation outlook rose for the second straight month.
These figures add pressure on the Fed to ease interest rates on Wednesday and strengthen the case of a dovish turn at the bank’s forward guidance. Such an outcome would have negative consequences for the US Dollar.
The Canadian Dollar, however, is failing to take a significant advantage from US Dollar weakness, as the Bank of Canada is also expected to cut rates by 25 basis points on Wednesday. Before that, the Canadian CPI prices are expected to show further moderation in August, paving the path for BoC’s rate cut.
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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