USD/CAD explores Year-to-Date lows below 1.3700 amid broad-based Dollar weakness
- The Canadian Dollar is testing YTD highs with the USD on the defensive.
- The “Sell America” trade is back on new tariff threats and looming US debt woes.
Strong Canadian GDP raises expectations of a hawkish BoC on Wednesday.
The US Dollar is dropping across the board, hammered by a mix of risk aversion amid Trump’s erratic trade policies, concerns about fresh tariffs, and looming fears of US debt that have revived the “sell America” trade.
The US President rattled markets on Friday, threatening to increase Steel and Aluminium levies from 25% to 50%, with the US Dollar taking the worst part. The announcement opened a new chapter on the chaotic trade policy and raised concerns that it will constrain economic growth and increase inflation.
Beyond that, an accusation that China has violated the trade agreement on minerals has received an energetic reaction from Beijing, which puts further pressure on the already deteriorated relationship between the world’s two major economies.
A weak Dollar and strong Canadian data keep the pair on its back foot
The market has reacted by selling the US Dollar. The Canadian Dollar is trading highest levels since last October, as the pair moves below the 1.3700, despite the fact that Canada is one of the main Steel exporters to the US.
The market seems to have prioritised the uncertainty about the US trade agenda above the potential impact on the Canadian economy, in case Trump’s threat finally comes to effect, which is another matter.
Macroeconomic data released on Friday revealed that US inflation keeps trending lower, at least for now, which gives leeway for the Fed to ease interest rates further. Fed’s Waller endorsed this view earlier today, and added pressure on the US Dollar.
In Canada, on the other hand, GDP numbers seen on Friday posted a positive surprise, with an unexpected acceleration in the first quarter. These figures have boosted expectations that the Bank of Canada might keep rates on Hold on Wednesday, which is providing additional support to the loonie.
Trade uncertainty and debt woes are weighing on the USD.
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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