USD/CAD struggles near 1.3555 area, just above two-week low amid USD bearishness

VaselineSeptember 20, 2024

0 3 minutes read

USD/CAD struggles near 1.3555 area, just above two-week low amid USD bearishness

USD/CAD is near a two-week low hit amid a Fed-inspired USD decline.
The recent rally in oil prices is supporting the Loonie and helping to cap the major.
Bets on a bigger interest rate cut by the BoC act as a headwind for the CAD and limit losses.

The USD/CAD pair is struggling to gain any meaningful traction during the Asian session on Friday and is currently trading around the 1.3555 region, within striking distance of a near two-week low hit the previous day.

The US dollar (USD) remains under some selling pressure for a second straight day and remains near its lowest level since July 2023, hit in response to the Federal Reserve’s (Fed) outsized interest rate cut on Wednesday. Moreover, Fed members have projected another 50 basis point drop in borrowing costs by the end of this year, which, along with the prevailing risk-on mood, is weighing on the safe-haven greenback and acting as a headwind for the USD/CAD pair.

Meanwhile, crude oil prices are consolidating their recent strong move to a more than two-week high and remain on course for a second straight week of gains amid concerns over falling global inventories. Apart from this, rising tensions in the Middle East are providing some support to the black liquid, which is supporting the commodity-linked Loonie and helping to cap the USD/CAD pair, although hawkish expectations from the Bank of Canada (BoC) are helping to limit the downside.

Markets have started to price in the possibility of a bigger move to cut the BoC rate by 50 bps next month after data released this week showed Canada’s CPI posted the slowest increase since February 2021 and monetary policy measures basis fell to the lowest level in the last 40 months. This, in turn, is preventing bulls from placing aggressive bets around the Canadian dollar (CAD) and lending support to the USD/CAD pair ahead of Friday’s release of Canadian retail sales data.

Apart from this, traders will take cues from BoC Governor Tiff Macklem’s speech later during the opening session in North America, which, along with oil price dynamics, should weigh on the CAD. Additionally, remarks from Philadelphia Fed President Patrick Harker and broader risk sentiment will drive USD demand, which should provide some impetus to the USD/CAD pair. However, spot prices look poised to post losses for the first week in three.

Fed FAQ

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability and to promote full employment. Its main tool for achieving these objectives is the adjustment of interest rates. When prices rise too quickly and inflation is above the Fed’s 2 percent target, it raises interest rates, raising 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 can lower interest rates to encourage lending, which hurts 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. Twelve Fed officials attend the FOMC—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 rotating one-year terms. .

In extreme situations, the Federal Reserve can resort to a policy called 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 of 2008. It involves the Fed printing more dollars and using them to buy higher quality 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 of bonds it holds at maturity to buy new bonds. It is usually positive for the value of the US dollar.

VaselineSeptember 20, 2024

0 3 minutes read

Fed FAQ

Vaseline

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