USD/CAD languishes below 1.3780 ahead of Canadian and US data releases
- The US Dollar extends losses against the CAD, with bears looking at the 1.3760 weekly low.
- Hopes that the Fed will announce a deeper easing cycle are hammering the US Dollar.
- The Bank of Canada is also expected to cut rates by 25 bps on Wednesday.
The US Dollar extends losses on Tuesday after a nearly 0.5% decline on Monday. Bears are focusing on 10-day lows, at 1.3760, with upside attempts capped below 1.3780 as the market awaits Canadian CPI and US Retail sales to frame interest rate decisions later this week.
The Greenback sold off on Monday, as investors turned their attention to the Fed’s two-day monetary policy meeting starting today. The sharp deterioration of the labour market has raised concerns that the bank might be behind the curve with rate cuts, and traders anticipate a dovish turn after Wednesday’s meeting.
US Retail Sales, Canada's CPI to frame central banks' decisions
Later today, US Retail Sales are expected to show a slight decline in consumption, mainly driven by lower vehicle purchases in August. The final data, however, is not expected to alter the view that the Fed will cut rates by 25 bps on Wednesday and signal further monetary easing ahead.
In Canada, the Consumer Price Index is seen stalling in August but accelerating to a 2% yearly pace from the previous month’s 1.7% reading. Likewise, BoC’s CPI is seen ticking up to a 2.7% annual increase from 2.6% in July and 2.5% in May.
The Bank of Canada, however, is widely expected to cut rates to 2.5% aiming to support a slowing economy and a quickly loosening labour market, and probably hint at further easing down the road. Nevertheless, investors seem more focused on the Fed, at least for now, which is giving the CAD a competitive advantage.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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.
