October 20-24 2014
R.I.P. QE
We mentioned at the end of
last week’s Dispatch that we expected the USD to be on the sidelines due to the
lack of yield support and talk of tapering the taper. This is exactly what
transpired last week as the USD was soft in the first half of the week, but
recovered in the second half to end the US dollar index weekly losing streak at
2 after 12 consecutive positive weeks.
Lately, the USD has not been
getting support from domestic economic data, but rather from the notion that
foreign governments and central banks would have to do more in order to support
their economies. Last week, speculation was rekindled that the Bank of Japan
and the ECB may need to add more simulative measures. The Bank of Japan now
sees a much bigger possibility of inflation slipping below 1%, fanning
speculation for additional easing. The BOJ’s next meeting is on October 31st,
which is the same day that the September inflation report is released.
Meanwhile in the Eurozone, speculation of more easing was spurred by reports
that the ECB may consider adding corporate bonds to its asset purchase program.
The ECB meets the following week. (Move along now – there’s no currency war
going on).
The FOMC meeting on Wednesday
will be the most important event of the week. The Fed is due to announce the
end of QE despite last week’s comments by James Bullard, the St Louis Fed
president, having made it appear slightly less certain. We expect the Fed’s
accompanying press release to strike a very dovish tone considering the market
volatility over the last couple of weeks (more on this below). Keep in mind
that the “R.I.P. QE” only applies to monetary policy in the USA, it is alive
and well in the UK and Japan, and the pressure is building for its introduction
in the Eurozone.
What will the Fed Do?
After some jittery market
nerves around the middle of this month, expectations have settled down, and the
Fed is generally expected to announce the concluding of QE. The part of the
statement that is normally devoted to QE could mostly be removed, which will
make for a shorter and more succinct declaration. Given
genera understanding of the
way the Fed operates, with key principal
centrists (Yellen, Fischer and Dudley)
mostly driving policy, this statement
is their heart, more so
than the minutes or dot-plot.
Mr. Mohamed El-Erian, Chief
Economic Advisor at Allianz SE and Chairman of President Barak Obama’s
Global Development Council
provides some excellent insight into what the Fed is likely to do this week:
1. Fed officials will slightly upgrade their
assessment of economic prospects. But their enthusiasm will be moderated by
renewed concerns about global economic weakness.
2. They will acknowledge the further decline in
the unemployment rate, while also noting that it overstates the improvement in
labor market conditions.
3. They will recognize the moderation of
inflationary pressures but hold back on declaring deflation an imminent threat
to economic well-being. Instead, they will observe that part of the downward
pressures on prices -- coming from lower oil prices -- provides both a boost to
consumer spending and offsets higher food costs.
4. They
will complete the
phased exit from
QE3, bringing large-scale
purchases of securities to an
end.
5. Finally, central bankers will shy away from
hinting that they are willing to consider a subsequent program of asset
purchases (QE4). Instead, they will reiterate their willingness to keep
interest rates low, should economic conditions warrant it.
(Full article found at
Bloomberg View)
In addition to these words,
the market will dissect how the Fed characterizes inflation. Recall that in September, the FOMC had
dropped the reference to the risk of core inflation being persistently below
target, hence, it would seem awkward to simply bring it back. It could refer to the breakdown in
market-based measures of inflation prospects, but also note that it has not
been confirmed in other measures.
VBCE Daily Foreign Exchange Update for Wednesday, Oct. 29th, 2014
USDCAD spot rate: 1.1138 - 1.1143 (AS AT 8:15AM PST)
|
RANGES:
|
Asia:
|
1.1158
|
to
|
1.1173
|
|
|
Europe:
|
1.1151
|
to
|
1.1167
|
|
|
North America:
|
1.1120
|
to
|
1.1160
|
Technical Support / Resistance:
|
S2
|
S1
|
R1
|
R2
|
|
1.1070
|
1.1120
|
1.1185
|
1.1255
|
Key Economic Data Releases:
-Canada
raw materials price index: -1.8% (exp. -0.9%)
-Canada
industrial product price index: -0.4%
(exp. -0.1%)-U.S. Fed interest rate decision: TBA @ 11:00am
-Bank of Canada Governor Poloz speech @ 1:15pm
Key Event Calendar:
|
DATE
|
CANADA
|
U.S.A.
|
|
|
|
|
|
Oct. 30
|
|
GDP Q3, Core PCE, jobless claims
|
|
Oct. 31
|
GDP
|
Core PCE price index, personal income /
|
|
|
|
spending, consumer sentiment index
|
Yesterday, USDCAD traded from 1.1253 down to 1.1166, its
lowest level in nearly 3 weeks and down more than two cents from the 5 year
high of 1.1384 seen earlier this month. USDCAD briefly bounced to 1.1196 before
easing back to hold near 1.1171 for the balance of the session. Despite
Monday’s Goldman Sachs downwardly revised oil price forecast, Oil (WTI) has
climbed to $82.69 today after a low of $79.48 on Monday. Global equity markets
continued higher for the most part on yesterday’s strong North American gains.
USDCAD continued lower overnight to 1.1151 and has extended down to 1.1120/25
this morning. The pairing has since bounced to 1.1145. The USD and the JPY were
the worst performing currencies yesterday and that trend has continued today as
we await the 11:00am U.S. Fed announcement. It is widely expected that the QE3
stimulus program will officially come to an end while the market looks for
clues to when interest rates will begin to rise and by how much the Fed intends
to raise rates over the next few years. Currently, the TSX is down 0.72% while
the DJIA is unchanged. EURCAD is down 0.20% trading between 1.4173 and 1.4231.
GBPCAD is down 0.15% trading between 1.7927 and 1.8030. JPYCAD is down 0.15%
trading between 0.01029 and 0.01034. Gold is down 0.43% trading between $1,221
and $1,230USD/oz, silver unchanged trading between $17.16 and $17.32USD/oz,
while oil is up 1%, trading between $81.46 and $82.69.
Sources: Reuters, Bloomberg, FXStreet,
RBC Capital Markets, Bank of Canada, U.S. Federal Reserve, CNBC, Forexlive
Please contact the VBCE trading desk at 604-685-1016 for more information on our corporate foreign exchange and wire payment services. Updates by stevebrown@vbce.ca
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