In a welcome but under-stated move, the US central bank, the Federal Reserve (Fed), just cut borrowing costs for the second time this year. To start, they’ve cut rates 25 basis points already because of concerns over a softening labor market. This decision is largely in line with what the market was expecting and comes on the heels of a hawkish Fed rate cut on Wednesday. All of these trends have combined to create a perfect storm for the US dollar (USD). It has failed most miserably to the Canadian dollar (CAD), with the USD/CAD currency pair now hovering below the mid-1.3900s.
The Fed’s recent moves are an acknowledgement of its constant fretting about the bad economic signals that point toward labor market weakness. Analysts had expected this rate cut, which is designed to support economic activity as the economy shows early signs of a growth slowdown. Whether the central bank goes that far or not, reducing borrowing costs will be an important piece of any such broader strategy. Secondly, it could announce the end of its quantitative tightening program as soon as December, marking the end of its balance sheet reduction.
Following the Fed’s announcement, the USD eased back from its more than two-week high. This decline made it a particularly weak performer against other currencies. USD/CAD instantly recovered from its bottom of 1.3890-1.3885, the lowest degree since 25 September. It wasn’t able to keep that momentum going and has floundered to really find its traction. It is still trading under the mid-1.3900s. This area is an important barrier of confluence as it lines up with the 200-day Simple Moving Average (SMA) for the pair.
Market participants are watching this situation like a hawk. They (and the rest of the world) look forward to seeing the results of a much-ballyhooed meeting between US President Donald Trump and Chinese President Xi Jinping. This summit will be significant and wide-ranging, including what’s sure to be contentious discussion about improving trade relations and advancing economic cooperation between the two countries. The FOMC meeting will have an additional effect on market sentiment and currency valuations.
The Bank of Canada provides excellent analysis of the state of the economy. These insights might even help underpin a more data-driven approach to its monetary policy decisions. Yet, both countries confront significant economic headwinds. Traders and investors will be looking at the swirling dynamics of the USD vs. CAD very closely.