USD/CAD tests fresh six-week lows sub-1.3630 amid wide US Dollar weakness
- USD/CAD extends its reversal from 1.3713, nearing six-week lows at 1.3635.
- Moderate optimism about US-Iran negotiations is keeping the US Dollar on the defensive.
- The BoC and the Fed will release their monetary policy decisions on Wednesday.
The US Dollar (USD) is showing the weakest performance among the G8 majors on Monday, and depreciates against the Canadian Dollar (CAD) for the second consecutive day. The pair trades at 1.3630 at the time of writing, to test fresh six-week lows after a knee-jerk reaction at 1.3713 on Friday.
A moderate optimism about a negotiated end of the Middle East conflict is keeping the safe-haven US Dollar on the defensive on Monday. The second round of US-Iran peace talks has been cancelled, but a report from Axios affirming that Tehran has sent a new peace proposal to the US is feeding a mild risk appetite alive at the week's opening.
Axios, citing a US official and two sources familiar with the matter, reported that Iran has offered the US the possibility of ending the conflict and reopening the Strait of Hormuz, and leaving nuclear negotiations to a later stage.
The key waterway, which transports about a fifth of global Oil production, meanwhile, remains shut for almost two months, keeping Crude prices supported near the key $ 100-per-barrel level. The barrel of the US benchmark West Texas Intermediate (WTI) has gained about $6 over the last two days and is trading at $94.70 at the time of writing, providing support to the commodity-sensitive CAD.
Central banks return to the focus
Apart from that, central banks will take the spotlight this week. The Bank of Canada (BoC) is expected to leave its monetary policy unchanged for the fourth consecutive time on Wednesday. The BoC is likely to note the higher inflationary pressures but will request more time to decide its monetary policy amid the uncertainty in the Middle East.
The US Federal Reserve (Fed) is likely to follow suit a few hours later. The market is fully pricing interest rates to remain on hold throughout 2026, according to the CME Fed Watch Tool, which also shows that there is a 66% chance that the central bank keeps its monetary policy steady in December this year.
Wednesday’s Fed meeting is likely to be also the last of Jerome Powell as the bank’s chairman, as his term ends in May, and former Governor Kevin Warsh has been appointed to replace him. What is not clear is whether Powell will keep his chair at the Board of Governors or will definitely leave the bank, as US President Donald Trump demands. The outcome of the Powell-Trump saga and the independence of the Fed are likely to remain an issue during the days following the meeting.
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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