Four-week lows: Canadian Dollar recovers as US Dollar momentum fades

1.4240: USD/CAD retains bullish bias despite retreat from four-week high of 1.4265.
US Dollar bears are likely to remain restrained by elevated US inflation and hawkish remarks from the Fed.
With weak employment figures reducing expectations of near-term BoC rate increases, the Canadian Dollar remains under pressure.

USD/CAD trades at 1.4243 at the time of writing. The pair has pulled back from the four-week high of 1.4265 reached earlier on Thursday, but is still heading for a weekly gain of 0.8%. In a quiet session, the Canadian Dollar (CAD) is edging higher as the US Dollar (USD) retreats from recent peaks against most major currencies.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Expectations of a further Federal Reserve (Fed) interest rate increase in December strengthened after this week's robust US Consumer Price Index (CPI) figures. Those expectations have supported the US Dollar.

Thursday's scheduled Fed speeches are likely to reinforce that outlook, which officials have already endorsed. Several policymakers are due to speak later in the day, including some who have previously favoured tighter monetary policy at the next meeting.

4.7K job losses curb expectations of immediate BoC rate hikes

By contrast, last Friday's disappointing Canadian employment report continues to weigh on the Canadian Dollar. After shedding 68.3K jobs in September, the economy lost a further 4.7K in October, rather than adding the 13.6K expected. The Unemployment Rate also climbed to 6.7%, a level last seen in April.

For TD Securities analysts, Canada’s “rising unemployment rate amid falling wage growth rate” weakens the argument for monetary tightening. They note that “diverging employment data releases will likely keep USDCAD supported above 1.40,”

The analysts argue that this environment “reduces the market pricing of a December BoC rate hike relative to the Fed,” exposing the Canadian Dollar to further underperformance against the US Dollar.

Central banks: key questions

2% inflation: what is a central bank's mandate?

Keeping inflation close to 2% is the mandate of major central banks, including the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). More broadly, central banks are responsible for maintaining price stability across a country or region. As prices of goods and services fluctuate, economies face inflation or deflation. A sustained increase in the prices of the same goods constitutes inflation; a sustained decline constitutes deflation. Central banks adjust their policy rates to keep demand in check.

Policy rates: how do central banks address inflation above or below target?

To raise or lower inflation, a central bank can adjust its benchmark policy rate, commonly referred to as the interest rate. At scheduled announcements, it publishes its rate decision and explains why the rate has been held, cut or increased. Domestic banks then change their savings and lending rates in response. This affects how easily savers can earn returns and businesses can borrow to invest in their operations. Substantial interest rate increases are described as monetary tightening, while reductions in the benchmark rate are known as monetary easing.

Monetary policy and interest rates: who makes the decisions?

Policy decisions are made by a central bank's policy board, whose members undergo a series of panels and hearings before appointment. Central banks are often politically independent. Board members typically hold distinct views on inflation control and the appropriate monetary policy response. Those who favour very accommodative policy, low interest rates and inexpensive borrowing to deliver a substantial economic boost, while accepting inflation slightly above 2%, are known as ‘doves’. By contrast, ‘hawks’ prefer higher rates to reward saving and keep inflation firmly contained. They seek inflation at or just below 2%.

Central bank leadership: who chairs policy meetings?

Meetings are usually led by a chairman or president, who must build consensus between hawks and doves. If votes on a policy change are split 50-50, the chair has the deciding vote. Speeches by the chair, often available to follow live, communicate the current policy stance and outlook. Central banks seek to advance monetary policy without causing sharp swings in interest rates, equities or their currencies. Ahead of policy meetings, all members signal their positions to markets. Public comments are then prohibited from a few days before the meeting until the new policy has been announced. This interval is known as the blackout period.