Expected USD/CAD Range: 1.024 – 1.044 Update: The big day is finally here. Today, the United States Federal Reserve announces its decision as to whether it will begin cutting back (“tapering”) the size of the bond purchase program popularly known as QE3. The Fed’s actions with respect to QE3, which has been holding down long term interest rates, will also be read by the market as a clue to when the Fed intends to raise rates once this extraordinary monetary stimulus is wound down.
There are a variety of factors to consider when determining the likely impact of the decision on markets. First, if the taper is not announced and delayed, expect a massive rally in equity markets and a significant decline in the US Dollar by at least one hundred basis points. Second, if the size of the taper is larger than the consensus $10-15 billion, then expect a bad day for equities and a rally in the US Dollar. Finally, the market will also be looking for information as to not just the magnitude of the taper but also its pace; will it be cut back by a certain amount each month until it is wound down or will each month’s decision be data dependent?
Our view is that this is one of those rare situations where the experts are right and consensus is correct. We expect (1) tapering to be announced today, (2) the size of the initial cut back to be $10 – 15 billion and (3) further cutbacks to be data dependent.
Another factor to keep in mind is that in the midst of all of this, BoC Governor Stephen Poloz will be speaking in Vancouver this morning and could deliver headlines that impact the Loonie before we hear from the Fed. The Big Picture: The commodity boom has seemingly ended (or is at least sputtering). Relatedly, Chinese and other emerging market economies have slowed notably. At the same time, the ongoing (admittedly halting) recovery in the US will sooner or later lead to a tapering of the Fed’s bond purchase programs. As to the timing of the announcement, there seems to be broad consensus forming about tapering beginning later this year with a majority of analysts focused on September. Closer to home, Canada’s new central banker shows no inclination towards tightening in the near future. As a result of all of this and not surprisingly, the CAD has declined 4% relative to the USD since the beginning of the year. We expect the CAD to be even lower relative to its US counterpart by the end of the year.
There are a variety of factors to consider when determining the likely impact of the decision on markets. First, if the taper is not announced and delayed, expect a massive rally in equity markets and a significant decline in the US Dollar by at least one hundred basis points. Second, if the size of the taper is larger than the consensus $10-15 billion, then expect a bad day for equities and a rally in the US Dollar. Finally, the market will also be looking for information as to not just the magnitude of the taper but also its pace; will it be cut back by a certain amount each month until it is wound down or will each month’s decision be data dependent?
Our view is that this is one of those rare situations where the experts are right and consensus is correct. We expect (1) tapering to be announced today, (2) the size of the initial cut back to be $10 – 15 billion and (3) further cutbacks to be data dependent.
Another factor to keep in mind is that in the midst of all of this, BoC Governor Stephen Poloz will be speaking in Vancouver this morning and could deliver headlines that impact the Loonie before we hear from the Fed. The Big Picture: The commodity boom has seemingly ended (or is at least sputtering). Relatedly, Chinese and other emerging market economies have slowed notably. At the same time, the ongoing (admittedly halting) recovery in the US will sooner or later lead to a tapering of the Fed’s bond purchase programs. As to the timing of the announcement, there seems to be broad consensus forming about tapering beginning later this year with a majority of analysts focused on September. Closer to home, Canada’s new central banker shows no inclination towards tightening in the near future. As a result of all of this and not surprisingly, the CAD has declined 4% relative to the USD since the beginning of the year. We expect the CAD to be even lower relative to its US counterpart by the end of the year.
