USD/CAD remains depressed below 1.3860 ahead of US jobs data
- USD/CAD remains below 1.3860, with two-month lows, at 1.3800 on sight.
- The Fed is widely expected to cut its benchmark interest rate on Wednesday.
- The BoC, on the contrary, will keep its monetary policy unchanged.
The US Dollar remains pinned near two-month lows at the 1.3800 area, with upside attempts so far limited to below 1.3860. The pair has lost about 2% since late November as investors began pricing in a Fed interest rate cut at this week's Federal Reserve meeting.
The focus today, however,i s on the Weekly US ADP Employment change and the release of delayed US JOLTS Job Openings data for September and October, which will frame Wednesday’s Fed Decision. The market consensus anticipates steady job openings, at 7.2 million in both months, slightly below the 7.22 million openings seen in August.
On Monday, US President Donald Trump threatened to impose higher tariffs on Canadian fertilisers, in an event announcing new aid for US farmers, although the impact on the Canadian Dollar was marginal.
The highlight of the week is Wednesday’s Federal Reserve monetary policy meeting. The Fed is widely expected to cut its benchmark interest rate by 25 basis points, although Chairman Powell might deliver a hawkish message, lifting the bar for further rate cuts. This view is keeping the US Dollar from falling further.
In Canada, the BoC is widely expected to keep its monetary policy unchanged on Wednesday. The bank cut rates by 25 basis points to the current 2.25% level in October and signalled the end of the rate cycle, and the strong Q3 Gross Domestic Product (GDP) figures have endorsed that view.
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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