Canadian Dollar holds near lows as high US yields buoy the Greenback
- USD/CAD holds its ground, with four-week highs, at 1.3724 at a short distance.
- Strong US CPI data crushed hopes of further Fed monetary easing on Tuesday.
- Investors remain cautious on Wednesday, awaiting the outcome of the Trump-Xi meeting.
The US Dollar (USD) is practically flat against the Canadian Dollar (CAD) on Wednesday, hovering at a short distance from the four-week high, at 1.3724. The strong US consumer inflation figures released on Tuesday, and the rally on US Treasury yields are supporting the US Dollar, while the high Oil prices keep the Loonie from falling further.
US Consumer Prices Index (CPI) data from April confirmed the inflationary impact of the Middle East conflict as the yearly rate accelerated to its highest level in nearly three years, at 3.8%, beating expectations of a 3.7% reading, and well above the 3.3% reading seen in March. The core CPI also beat expectations, with a 2.8% growth in the last 12 months from 2.6% in March.
Fed easing expectations fall
These figures prompted investors to abandon any hope of further Federal Reserve (Fed) monetary easing in the foreseeable future, while expectations for a rate hike grow. The CME Group’s Fed Watch Tool reflects a 30% chance of a quarter-point monetary tightening before December this year, up from 15% one week ago. This is fuelling the rally in US Treasury yields, which are right below 2026 highs, and buoying the Greenback.
The Canadian Dollar, on the other hand, is drawing support from the high Oil prices amid the stalemate in the US-Iran peace process. Oil is Canada’s main export, and the WTI Oil barrel remains $97.00, boosting Canada’s trade revenues and underpinning the Loonie.
In the calendar on Wednesday, the main event will be the US Producer Price Index (PPI) for April, which is also expected to show a significant acceleration. The focus, however, will remain on US President Donald Trump's visit to China, where he is expected to discuss Iran’s conflict, Taiwan’s status, and rare earths trade, among other topics, with his Chinese counterpart, Xi Jinping.
(This story was corrected on May 13 at 07:13 GMT to say that Fed rate hike expectations for December were at 15% one week ago, and not at 21% as previously stated.)
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
