USD/CAD holds gains near one-month highs above 0.3740 on cautious markets, soft Canadian data
- The US Dollar appreciated more than 1% against the loonie last week, boosted by risk aversion.
- Concerns of an escalation of the Middle East conflict have offset the positive impact of higher Oil prices in the CAD.
- USD/CAD remains in a bearish trend, 6.5% below February's highs.
The US Dollar is practically flat against its Canadian counterpart on Monday, consolidating gains after an impulsive recovery from year-to-date lows at 1.3538 last week.
The Greenback appreciated more than 1% in the previous three trading days, with investors rushing for safe assets as risk aversion escalated as the US prepared this weekend's attack on Iran.
The risk-averse sentiment and the hawkish comments from Fed President Jerome Powell, following last week’s monetary policy decision, offset the positive impact of Crude oil’s rally in the Canadian Dollar.
Weak Canadian data added pressure on the CAD last week
In the macroeconomic domain, Canadian retail sales figures failed to boost enthusiasm on Friday, with a shorter-than-expected increase in May. Excluding automobiles, sales of all other products contracted against expectations for the second consecutive month.
Beyond that, prices for industrial products contracted further in May, against expectations of a flat performance. All in all, figures that point to a soft economic growth in the second quarter, adding pressure on the BoC to ease interest rates further and weighing on the CAD.
The longer USD/CAD trend, however, remains bearish. The Dollar has depreciated by about 6.5% from February’s highs, weighed by the softer US economic data and the negative impact of Trump’s erratic trade policy.
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.
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.
