- USD/CAD depreciates as BoC Governor Macklem indicates a more gradual approach to policy outlook if the economy evolves broadly.
- Broader market sentiment remains steady after the US inflation figures aligned with market expectations.
- Traders await US November Producer Price Index data due on Thursday to gain fresh impetus.
USD/CAD extends its losses for the second successive day, trading around 1.4150 during the Asian session on Thursday. The USD/CAD pair continues its retreat from Wednesday's high of 1.4194, the highest level since April 2020. This downside is due to the strengthening of the Canadian Dollar (CAD) as the Bank of Canada (BoC) signaled a slower pace of future interest rate cuts following its recent decision.
On Wednesday, the Bank of Canada implemented another substantial 50 basis point rate cut, bringing the main interest rate down to 3.25%. With Canada's Unemployment Rate reaching multi-year highs, the BoC has all the necessary grounds to disregard recent inflation upticks.
Bank of Canada (BoC) Governor Tiff Macklem stated "We anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected." Macklem also said that monetary policy no longer clearly needs to be in restrictive territory.
Broader market sentiment remains on balance after US CPI inflation figures matched market expectations on Wednesday. US Consumer Price Index (CPI) rose to 2.7% year-over-year in November from 2.6% in October. The headline CPI reported a 0.3% reading MoM, in line with the market consensus. Meanwhile, the core CPI, excluding volatile food and energy prices, climbed 3.3% YoY, while the core CPI increased 0.3% MoM in November, as expected.
This latest US inflation report does not seem enough to keep the Federal Reserve (Fed) from cutting rates at its December meeting next week. Traders await the release of the US November Producer Price Index (PPI) for fresh impetus, which is due later on Thursday. The CME FedWatch Tool suggests nearly a 99% chance of Fed rate reductions by 25 basis points on December 18.
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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