Markets are in wait-and-see mode this morning and largely unchanged as we await the Federal Reserve announcement later today. Let’s review where are right now. Stocks continue to hover around record levels. Most commodities are trading at multi-year highs and sovereign yields are flat after creeping up again over the last few days. In the midst of all of this, the Canadian dollar is trading near its highest level since January of 2018 despite overall US dollar strength against most other currencies. In fact, since the start of the year, CAD is up 3% against USD even though the US currency is up 1% against a basket of other major currencies. In Canada and the US the economic picture is similar; the economic recovery is well under way and employment is recovering. What is different is the position of each country’s central bank. The Bank of Canada has now put the market on notice that it will be looking to pull back quantitative easing relatively soon and that a rate hike is likely next year. The Fed has on the other hand has shown no inclination to back off of its accommodative policies. That is why this afternoon’s statement and press release from the Fed could potentially be very important to the USD to CAD exchange rate. If there is a signal that the Fed intends to pull back sooner than expected then you can expect CAD to lose some of the ground that it has gained since last week’s Bank of Canada statement.
