USD/CAD returns beyond 1.3800 amid generalised US Dollar strength
- A firmer US Dollar bounces up against the CAD on Monday and returns above 1.3800.
- The Greenback appreciates across the board on Monday, favoured by a cautious market mood.
- Later on, a slew of Fed speakers will give further clues about the bank's near-term monetary policy.
The US Dollar has bounced up strongly against its Canadian counterpart on Monday, to regain most of the ground lost on Friday and return to levels past 1.3800, from the 1.3770 area at the day's opening. The pair is drawing some support from a cautious market sentiment in early European trade, with investors bidding their time, awaiting a batch of Fed speeches to provide further clues about the bank’s monetary policy plans.
Five policymakers from the Federal Reserve will speak later today, but the primary focus will be on the new appointment, Stephen Miran, who will talk about Non-Monetary Forces and Appropriate Monetary Policy at the Economic Club of New York.
Miran is expected to defend his position as an independent board member, despite being appointed by Fed President Donald Trump amid an unprecedented campaign to bend the central bank’s arm into accelerating its monetary easing cycle.
He will also delve into the reasons for supporting a 50 basis points rate cut last week, against the committee’s decision of a quarter-point rate cut. His speech is likely to draw some contrast with Fed Powell’s conference, scheduled for Tuesday.
In Canada, the CAD pared some losses on Friday, following Canadian Retail Sales figures. Consumption contracted in July, in line with expectations, but preliminary data anticipated a 1% increase in August, which makes up for July’s decline and eased hopes of back-to-back BoC rate cuts.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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