Canadian Dollar picks up from four-week lows as the US Dollar loses steam
- USD/CAD eases to 1.4240 from four-week highs at 1.4265 but maintains its bullish bias intact.
- Strong US inflation and hawkish Fed comments are likely to keep US Dollar bears subdued.
- The Canadian Dollar remains on the back foot as soft labour data has dampened hopes of immediate BoC rate hikes.
The Canadian Dollar (CAD) posts marginal gains on Thursday as the US Dollar (USD) retreats from recent highs against most peers in a quiet market session. The USD/CAD changes hands at 1.4243 at the time of writing, down from a four-week high at 1.4265 hit earlier in the day, although it remains on track for a 0.8% weekly rally.
The US Dollar has drawn support from the strong US Consumer Price Index (CPI) figures seen earlier this week, which boosted expectations that the Federal Reserve (Fed) will hike interest rates further in December.
Fed officials have backed those views and are likely to point in that direction again on Thursday. A string of policymakers are expected to speak later in the day, some of whom have already shown their support for tightening monetary policy in the next meeting.
Soft Canadian labour data dampened hopes of immediate BoC hikes
The Canadian Dollar, on the contrary, is still paying a toll from the disappointing Canadian labour market report released last Friday. The country's economy lost 4.7K jobs in October, against expectations of a 13.6K increase, following another 68.3K decline in September. Beyond that, the Unemployment Rate rose to 6.7%, its highest level since April.
TD Securities analysts observe that “diverging employment data releases will likely keep USDCAD supported above 1.40,” as Canada’s “rising unemployment rate amid falling wage growth rate” undermines the case for tighter policy.
In their view, this backdrop “reduces the market pricing of a December BoC rate hike relative to the Fed,” leaving the Canadian Dollar vulnerable to further underperformance against the Dollar.
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.