1.4195: Canadian Dollar tests range top amid lower US Yields, dovish Fedspeak
- USD/CAD hits fresh two-week lows below 1.4200 after Wednesday's rejection at the 1.4300 area.
- Lower US Treasury yields and dovish comments from Fed officials have hampered the US Dollar.
- Fed officials Bowman and Daly hint at a monetary policy pause in October.
The Canadian Dollar (CAD) has shown a sharp recovery against the US Dollar (USD) over the last few sessions, with the USD losing momentum, weighed by lower US Treasury yields and dovish comments by Federal Reserve (Fed) officials. The USD/CAD pair is trading at fresh two-week lows around 1.4195 as of writing, after being rejected at the1.4300 area for the second time in the last two weeks.
The US Dollar rallied on Wednesday as US Consumer Price Index (CPI) figures confirmed that the impact of higher Crude prices stemming from the Middle East conflict is spreading beyond energy, raising concerns about the feared second-round effects. Inflation figures boosted speculation that the Federal Reserve might hike interest rates at the October meeting, but Fed officials cooled those hopes, triggering a significant reversal in US Treasury yields and the US Dollar.
Fed officials signal cautious post-hike pause
Federal Reserve Vice Chair for Supervision Michelle Bowman agreed that the bank might have to hike interest rates further but hinted at a pause in October to assess how financial markets and the economy evolve after September's rate hike.
Bowman delivered an overall hawkish speech, scoring 6.2 on the FXS Speechtracker, modestly above the 5.9 historical average, indicating a slightly firmer tone relative to the established baseline. Nevertheless, the urge for a more cautious, data-dependent stance clashed with market expectations of a more aggressive approach, with back-to-back interest rate hikes.
In a similar vein, San Francisco Fed President Mary Daly reiterated that more rate hikes are “likely” but warned that the timing is still under consideration. Daly added that it is still uncertain if "inflation will ease as shocks fade or worsen if shocks continue," and affirmed that it is "better to be thoughtful and deliberate."
The Canadian Dollar, on the other hand, is facing moderate headwinds as Crude prices retreat from recent highs, which keeps the Loonie from appreciating further. In the calendar this week, Canada's Manufacturing Sales and Wholesale Sales figures might provide some fundamental guidance later on Thursday. The highlight of the week, however, is likely to be the Bank of Canada (BOC) Tiff Macklem's comments at a panel discussion in the International Monetary Fund (IMF) meeting in Bangkok, Thailand, on Friday.
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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