USD/CAD pulls back below 1.3850 ahead of US data, BoC Macklem's speech
|- The US Dollar eases from session highs at 1.3870 amid the escalating Trump-Fed war.
- Investors are bracing for weak US Durable Goods Consumer Confidence figures.
- Later on the day, BoC Governor Tiff Macklem might provide further insight into the bank's monetary policy stance.
The US Dollar has retraced its previous gains against the loonie on Tuesday, retreating to levels right below 1.3850 after being capped at intra-day highs near 1.3870. The pair has turned negative on daily charts ahead of the release of US Durable Goods orders and Consumer Confidence figures, and a speech by BoC Governor Macklem.
The pair wobbled earlier on Tuesday as Trump escalated his attacks on the Federal Reserve, calling for the resignation of Fed Governor Lisa Cook over an alleged mortgage fraud.
Cook responded to the president on Tuesday, refusing to stand down and confirming that she will continue with her duties at the central bank, as she said, the president has no authority to fire her.
The focus now is on the US macroeconomic data, which is expected to show further signs of economic softening. Durable Goods orders are expected to have contracted at a 4% pace, following a 9.3% fall in the previous month, while the consumer confidence is seen deteriorating to 96.2 from 97.2 in July.
Somewhat later, in Canada, BoC Governor Macklem will speak at the Bank of Mexico’s 100th Anniversary Seminar, and might give further clues about the bank’s next monetary policy steps.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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