- The Canadian Dollar has seen little but downside this week.
- A pivot to market Fed expectations is sending investors into the US Dollar.
- Crude Oil bids try to recover, limiting Loonie losses for Friday.
The Canadian Dollar (CAD) is in the red overall for the week, set to close down or flat for the fifth trading day in a row, its worst day-on-day performance since April.
Canada has seen a thin showing on the economic calendar all week, and next week is set for more of the same as broader markets focus on the US Dollar (USD) and investors get pushed around by central bank expectations.
Daily Digest Market Movers: Canadian Dollar recedes as traders pick the Greenback
- The CAD is trying to reverse a week of losses, shedding 1.5% against the USD.
- Risk aversion appears to be the general tone to overall market themes, sending the USD higher across the board.
- US Michigan Consumer Sentiment Index for November dropped back to 60.4 from 63.8.
- UoM 5-Year Consumer Inflation Expectations ticked up from 3% to 3.2%.
- Federal Reserve Chairman Jerome Powell’s hawkish showing yesterday continues to bleed through markets as investors prove jittery around inflation.
- Crude Oil is seeing soft gains for Friday, helping to support the Loonie and limit CAD losses.
- Next Tuesday sees US Consumer Price Index (CPI) inflation figures that should electrify Greenback traders.
Technical Analysis: Canadian Dollar drops to 1.3850 against US Dollar
The USD/CAD has climbed 1.65% bottom-to-top this week, sending the Loonie-Greenback pair into familiar highs and etching in a Friday peak of 1.3850.
The pair kicked off the week’s trading with a clean bounce from the 50-day Simple Moving Average (SMA) near 1.3630, and the week’s price action has been notably one-sided the entire way through.
Monday’s low-side rebound also saw a rejection from a rising trendline from July’s swing low into the 1.3100 region.
The near-term ceiling for USD/CAD bulls to beat will be the 1.3900 handle, a technical barrier that rejected the pair at the beginning of the month.
USD/CAD Daily Chart
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.