Canadian Dollar hovers near seven-month lows as lower Oil prices offset risk appetite
- USD/CAD holds above 1.3950, with seven-month highs at 1.4020 on sight.
- Lower Oil prices are weighing on the Canadian Dollar, offsetting the impulse from risk appetite.
- Market volatility remains subdued with the Federal Reserve decision on tap.
The Canadian Dollar (CAD) is trading without a clear bias against the US Dollar (USD) on Monday. The USD/CAD pair oscillates above 1.3950, with year-to-date highs at 1.4020 within a relatively short distance, as US Dollar weakness, stemming from the risk-on market, has been offset by the negative impact of declining Oil prices on the CAD.
Moderate appetite for risk dominates the market at the week's opening, following news that the US and Iran have reached a memorandum of understanding that will end the three-month war and reopen the Strait of Hormuz.
Lower Oil prices hurt the CAD
Investors have reacted by paring back their long positions in the safe-haven US Dollar, which is showing the weakest performance among the major currencies on Monday. The Canadian Dollar, however, has been unable to capitalise on the Greenback’s weakness, weighed down by the decline in Crude prices. Oil is Canada’s main export, and the fall in Brent prices, which are trading at three-month lows at the time of writing, is widely expected to curb Canada's foreign trade revenues.
Apart from that, traders are likely to be looking from the sidelines ahead of the US Federal Reserve meeting on Wednesday. The bank is expected to stand pat on rates, and the main interest of the event will be the bank's rate and economic projections, and the new Chairman Kevin Warsh’s press release to detect changes in the forward guidance.
In Canada, last week, the Bank of Canada (BoC) left interest rates unchanged and highlighted the challenges posed by high inflation combined with sluggish economic growth. The CAD fell below 1.4000 against the US Dollar for the first time since last November.
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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