USD/CAD trades with caution as FOMC minutes take centre stage
- USD/CAD trades cautiously below 1.4200 as investors await FOMC minutes for the January policy meeting.
- The Fed cuts its key borrowing rates by 100 bps in 2024.
- Canadian inflation accelerated in January, still it remained below BoC’s target of 2%.
The USD/CAD pair trades subduedly below 1.4200 in Wednesday’s European session. The Loonie pair is slightly down as the US Dollar (USD) ticks lower ahead of the Federal Open Market Committee (FOMC) minutes for the January policy meeting, which will be published at 19:00 GMT. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 107.00.
Investors will pay close attention to the FOMC minutes to get cues about the monetary policy outlook. Meanwhile, Fed officials have been guiding a restrictive monetary policy stance until they see inflationary pressures resuming to their journey on the 2% path.
In the January meeting, the Fed left interest rates steady in the range of 4.25%-4.50% after reducing them by 100 basis points (bps) in the last three policy meetings of 2024.
Globally, the market sentiment is slightly favorable for risk-perceived assets even though fears of United States (US) President Donald Trump have renewed. On Tuesday, Trump threatened to impose 25% tariffs on all imports of automobiles, semiconductors, and pharmaceuticals. He didn’t provide any timeline about when they get executed to offer some time to local manufacturers to pace up operating capacities.
Meanwhile, the Canadian Dollar (CAD) is broadly underperforming its peers even though inflationary pressures accelerated in January expectedly. On year, the Consumer Price Index (CPI) rose by 1.9% faster than 1.8% growth in December. Month-on-month inflation grew by 0.1% after deflating by 0.4% last month.
Hot Canadian CPI data is unlikely to restrict the Bank of Canada (BoC) from easing the monetary policy further. Despite an increase in inflation, it is still below the central bank’s target of 2%.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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