The Canadian dollar continues to trade quietly, as USD/CAD has inched lower in the Friday session. Currently, the pair is trading at 1.2570, down 0.10% on the day. Canada and the US will both release key employment numbers in the North American session, so traders should be prepared for movement from the pair. In the US, Nonfarm Payrolls is expected to slow to 182 thousand, while wage growth is forecast to edge up to 0.3%. In Canada, employment change is expected to post a gain of 13.1 thousand, after last month’s huge gain of 45.3 thousand.
The Canadian dollar has enjoyed a strong run, gaining 7.8% against the greenback since May 1. The Canadian economy has improved, thanks to stronger global demand and higher oil prices. In July, the Bank of Canada raised interest rates from 0.50% to 0.75%, marking the first rate hike since 2009. The Canadian dollar jumped to an 11-month high after the rate increase, and investors will be monitoring the bank carefully – hawkish statements could lift the currency. The BoC holds its next policy meeting on September 6.
Janet Yellen & Co. continue to talk about the possibility of a December rate hike, but with the odds for a December increase pegged at just 42%, it’s clear that the markets are skeptical about a third rate hike in 2017. Investor attention has shifted to the Fed’s balance sheet, which stands at $4.2 trillion. Fed policymakers have broadly hinted at reducing purchases of bonds and securities starting in September, but San Francisco Fed President John Williams was more forthcoming about the Fed’s plans this week, in a clear message that was likely aimed at giving notice to the markets. In a speech on Wednesday, Williams said that the economy had ‘fully recovered’ from the 2008 financial crisis and called on the Fed to start trimming the balance sheet ‘this fall’. Williams added that the process would be gradual and would take four years to reduce the balance sheet to a ‘reasonable size’. On Wednesday, two other FOMC members also came out in support of starting to taper the balance sheet – St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester.
With the Federal Reserve widely expected to begin trimming its balance sheet next month, how will this affect the US dollar? The Fed is expected to initiate the wind-down by not replacing maturing bonds, which will reduce the balance sheet by $200 billion in 2017, according to the Institute of International Finance (IFF). The IFF estimates that this would be equivalent to three normal interest hikes, so the greenback should head upwards once the Fed starts winding down its bloated balance sheet.
