The Canadian dollar is showing some strength towards the big FOMC decision: Ben Bernanke and his colleagues are expected to announce a reduction of bond buys in a highly anticipated meeting.
The Fed did NOT announce tapering, dollar crashes – USD/CAD falls towards 1.02. Note that the decision was due to the “wrong” reasons for the loonie – a weaker US economy. The Canadian economy needs a strong US economy. That’s why the reaction in USD/CAD was significant, but not as strong in other currencies, such as EUR, GBP and the other commodity currencies: AUD and NZD.
The Canadian dollar received a “shot in the arm” from the recent excellent jobs figures, and just one day before the Fed decision, Canadian manufacturing sales rose by a strong 1.7% (nearly triple the 0.6% gain expected) and this also boosted the loonie: USD/CAD fell to a low of 1.0273, a level last seen in early August.
The pair didn’t stay there too long, as the upcoming Fed decision warranted caution for many traders, but the pair also didn’t bounce too far. This reflects the strength of the Canadian dollar.
In addition, it is important to note that the prices of oil have fallen after tensions around Syria dropped. Nevertheless, the Canadian dollar remains firm, and this also shows strength.
All in all, the C$ is entering the potential QE tapering decision with relative strength.
However, it is important to stress the key point regarding the loonie and QE tapering:
- If tapering is made thanks to the recovery of the US economy, this is positive for the loonie: Canada needs a strong US – Canada relies more on US demand than on oil exports.
- If QE tapering is made due to fear of bubbles (including a possible bubble in the price of oil), this is loonie negative. Less flows of US dollars due to the lack of QE and the lack of demand is certainly negative for Canada.