USD/CAD hits lows sub-1.3650 with the US-Iran ceasefire on tenterhooks

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USD/CAD hits session lows below 1.3650 with all eyes on the Middle East conflict.
Trump extended the ceasefire until Iran delivers a unified peace plan.
US Dollar crosses trade within previous ranges amid a cautious market sentiment.

The US Dollar (USD) posts minor losses against the Canadian Dollar (CAD) on Wednesday, and is testing session lows below 1.3650 at the time of writing, following rejection at the 1.3675 area on Tuesday. The USD/CAD pair, however, remains trading within previous days’ ranges, as investors hold their breath with the ceasefire in the Middle East under threat.

The situation in the Middle East is deteriorating, despite the ceasefire extension announced by US President Donald Trump on Tuesday. The Islamic Revolutionary Guard Corps (IRGC) has stepped up the tone against the US, threatening with “crushing blows” against American assets in the region, and Associated Press (AP) has reported at least one attack by Iranian forces on vessels attempting to cross Hormuz.

Trump prolonged the ceasefire unilaterally on Tuesday until Iran delivers a unified proposal to end the hostilities. The US military, meanwhile, maintains the blockade of Iranian ports, which has been considered by Tehran as an act of war and a violation of the ceasefire.

On Tuesday, the US Dollar received a fresh boost from upbeat US Retail Sales figures and the testimony of the Federal Reserve (Fed) Chair nominee, Kevin Warsh. The former Fed governor assured that he does not have any deal with the US president, who appointed him to the job, and defended the independence of the central bank’s monetary policy.

Earlier this week, Canadian Consumer Prices Index (CPI) figures confirmed the inflationary impact of Iran’s war, but the data came short of the market expectations. This grants the Bank of Canada (BoC) more time to decide thots next monetary policy actions and provided a moderate impulse to the Canadian Dollar.

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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.