USD/CAD clings to gains around 1.3659 with all eyes on the Fed minutes
- USD/CAD appreciates for the sixth consecutive day and reaches the 1.3650 area.
- The US Dollar remains bid in calm markets with Fed minutes on focus.
- Soft Canada's CPI figures strengthen the case of a BoC rate cut in July.
The US Dollar (USD) appreciates for the sixth consecutive day against the Canadian Dollar (CAD), reaching 1.3650 at the time of writing, but remains below the early February highs, in the area of 1.3720, which keeps the broader bearish trend in play.
The US Dollar has been trading moderately higher across the board this week, although market volatility remained subdued, with most Asian markets closed for the Lunar New Year holidays, and investors awaiting key US economic releases due in the second half of the week.
Fed's monetary policy in the spotlight
On Wednesday, the focus will be on the minutes of the Federal Reserve’s January meeting, which are expected to highlight a diverging monetary policy committee. On Tuesday, Chicago Fed President Austan Goolsbee highlighted those divergences, pointing to the possibility of “several rate cuts in 2026” while the bank projects only a quarter-point cut this year.
The highlights of the week, however, will be the US Q4 Gross Domestic Product (GDP) and the Personal Consumption Expenditure (PCE) Price Index figures, both due on Friday.
In Canada, Consumer Price Index (CPI) data released on Tuesday revealed that inflation moderated in January, with the yearly CPI ticking down to 2.3% from 2.4% in the previous month, and monthly inflation stalling against expectations of a 0.1% rise. These figures cement hopes of a rate cut in July, although the impact on the Loonie was marginal.
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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