As we approach the end of the calendar year, one of the top-performing, most stable currency pairs, THE currency pair, has been USD/CAD. On Wednesday during the Asian trading session, it was trapped in a narrow range around 1.3700. This wave of consolidation coincides with a historic shift in monetary policy from the Federal Reserve. These developments are having a cumulative and profound effect on the value of the US dollar to the Canadian dollar.
Federal Reserve’s Monetary Policy Influence
The Federal Reserve has immense power and independence to influence the course of monetary policy in the US. Judging by the recent discussions coming out of the Fed, you would think we’re on the verge of a major interest rate pivot. The Fed would have some room to cut interest rates should inflation fall sufficiently below its 2% target rate. It should do so if the unemployment rate remains elevated. These types of moves are designed to discourage saving, encourage borrowing and in turn stimulate economic growth.
The new Consumer Price Index (CPI) data is out, and it shows headline inflation falling. It fell to 2.7% y-o-y in November, down from 3% in September. This unexpected decline raises all kinds of questions about what the Fed should do next. It now needs to figure out how to achieve robust economic growth without stoking inflation.
“Most participants judged further rate cuts would likely be appropriate if inflation declined over time as expected.” – FOMC minutes
Federal Open Market Committee (FOMC) minutes underscore the Fed’s commitment to modifying interest rates based on inflation path. This decision might have a great positive impact on the power of US dollar.
US Dollar Index Shows Strength
The US Dollar Index (DXY) recently spiked as high as almost 98.26. This is a one week high as it is the dollar’s value against six other major currencies. This first move is a direct result of the market reacting to mounting economic data and policy rhetoric from the Federal Reserve.
Analysts warn that any likely decline in interest rates may add downward pressure on the Greenback’s value in the months ahead. With inflation coming down, economic conditions are clearly changing. Traders are understandably keeping a very close eye on these changes, trying to predict the ways in which they’ll affect currency markets come the new year.
Canadian Dollar Stabilizes Amid Thin Trading Volume
The Canadian dollar, or Loonie as it’s often referred to, has remained strong. At the same time, the USD/CAD pair is settling in near the 1.3700 figure. The trading volume has been microscopically thin, a feature of end-of-year trading as the market players get ready for holiday breaks.
The Loonie’s remarkable stability given the uncertainty being thrown up by US monetary policy indicates that traders are proceeding with great care. As they navigate these uncertainties, many are awaiting further economic data that may shed light on future trends in inflation and employment.