USD/CAD – BoC Deputy Governor says tapering is bearish for Canadian dollar

on Aug 28, 2013
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**iNVEZZ.com, Wednesday 28 August:**

Yesterday the Bank of Canada Deputy Governor John Murray primarily discussed US tapering and its potential effects on global markets, which he thinks are being negatively exaggerated by pundits. The BoC Deputy Governor believes that reducing quantitative easing is a ‘’a good and natural thing’’ because Fed policymakers believe the American economy has achieved self-sustaining momentum.

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Murray acknowledged that one of the effects of the unorthodox monetary stimulus has been upward pressure for the Canadian dollar. Nevertheless, that negative was offset by high exports to the US and elevated commodities and asset prices. He also believes that the curbing of asset purchases will create a downward force for the loonie as the US dollar receives a boost from a rising interest rate differential with foreign counterparts that are still easing.

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Although there are going to be challenges for developed and emerging economies once tapering starts, the Canadian policymaker warned that ‘’if interest rates are kept low for too long, both price and financial stability would suffer.’’ Murray cautioned that nations will have to get “their own houses in order” as flaws “that were previously concealed by generous amounts of global liquidity may become more evident as normal monetary conditions are restored.” The BoC Deputy Governor also added that ‘’the improving underlying strength of the U.S. economy should more than compensate for the drag from higher interest rates.’’

US MBA Mortgage Applications for last week reported a decline of 2.5 percent, following a drop of 4.9 percent in the prior period. The decay was driven by a fall of 5.0 percent in the refinance component. The Refinance Index was down 8 percent in the prior release and it is 64 percent lower from the April peak. However, the Purchase Index showed growth of 2.0 percent after a 1.0 percent gain in the previous period.

The USD/CAD has edged marginally higher today to 1.0488 or 0.11 up intraday.
US Pending Home Sales for July are scheduled at 15.00 BST, with an expected decline of 1.0 percent after June’s drop of 0.4 percent. Regardless of the lowest release of New Home Sales in 9 months last Friday, analysts expectations range from -2.0 to 5.3 percent and display a bullish note despite the negative consensus.

The loonie will also want to factor in US Crude Oil Inventories for last week, to be released at the same time due to the strong Canadian dependence on the energy sector. Analysts are expecting a mild increase to 360.6 million barrels from the prior 359.1 million barrels. This year has seen a stronger demand for crude oil and the latest uncertainty in the Middle East may motivate a rise in stocks amid fear of higher prices. The chart below displays how this year’s Crude Oil Stocks have fared against the 5-year range and the seasonal tendencies like a rise in inventories before the Winter.
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