Expected USD/CAD Range: 1.020 – 1.030 Update: Wow! In a major surprise to the markets, the FOMC decided not to” taper” in September and kept to the status quo on its two major bond buying programs known as QE3. The Fed effectively got cold feet and pointed to the mixed data on employment and economic activity as well as the possibility of further fiscal uncertainty to justify its decision. Future tapering may or may not occur this year depending on the strength of the data. In reaction, the equity markets rallied and the USD plummeted across the board and closed down nearly 0.8% at 1.022 against the CAD. Also yesterday, Bank of Canada Governor Stephen Poloz spoke in Vancouver and painted a fairly optimistic picture of the Canadian economy. He expressed comfort with the real estate market and reiterated the 2% inflation figure as “sacrosanct.” He provided no new information that could move market expectations as to the timing of a rate raise. For USDCAD traders, we are essentially back to where we started our taper watch a few months ago; analyzing data for clues as to the relative economic strength of the US and Canada. 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. 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 3% 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.
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