USD/CAD keeps wavering below 1.3970 ahead of the FOMC minutes
- The Dollar retreated from 1.3970 again but remains within previous ranges, above 1.3940.
- Upbeat IVEY PMI figures and higher Oil prices are providing some support to the Canadian Dollar.
- The main focus today is on the release of the minutes of the last Fed meeting.
The US Dollar is drifting lower against the Canadian Dollar on Wednesday after another rejection at the 1.3570 resistance area. pair, however, remains moving back and forth within the last two weeks’ horizontal channel above 1.3940.
The Dollar is drawing support from the global risk aversion as the political uncertainty in France and Japan sent the Euro and the Japanese Yen tumbling this week. On the other hand, growing concerns of a prolonged shutdown of the US government are starting to hurt risk appetite and increase speculative demand for safe havens, including the US Dollar.
The highlight this week is the release of the minutes of the last Fed meeting, but they are unlikely to show anything new, other than the divergences among the monetary policy committee about the next steps. The market has already priced in a 25 bps rate cut in October, and the FOMC minutes are not expected to alter that view.
Fed policymakers staged their divergences on Tuesday. Minneapolis Fed President Neel Kashkari warned about a burst of high inflation if the bank lowers interest rates too quickly, while Stephen Miran, at the dovish end of the Government Board, reiterated that monetary policy needs to ease.
In Canada, September’s IVEY PMI surprised on Wednesday, jumping to its highest reading in the last 15 months, at 59.8 from 50.1 in August, and beating expectations of a softer increase to 51.2.
These figures and the rebound in Oil prices, with the US benchmark WTI reaching one-week highs above $62.00 are providing some support to the Canadian Dollar, yet with upside attempts limited for now, as the risk-averse market keeps the US Dollar buoyed.
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.
