USD/CAD Rebound Unravels as Fed Prepares to Purchase Corporate Bonds

USD/CAD has emerged as the latest currency peg during the past few months. Should this move be expected to play out over the longer term?

Some of the recent technical analysis on the price of different currencies in relation to the USD is that there are some patterns emerging that could be considered as a reversal pattern. For example, there are a dip and a rise after a major reversal from a major change in trend. For others it is difficult to establish why these currency pairs began to reverse but it has been speculated that it was due to the recent tightening of financial policy in the US.

The fact is that the various technical indicators all point in the same direction: the US economy is slowing down in relation to the rest of the world, and the momentum created by Fed policies are starting to dissipate. It is therefore not unreasonable to suggest that the USD/CAD might move back up if the US economy continues to slow down and the Fed does not begin to ease up on its tight monetary policy.

The question is, can the financial markets allow a move back up to happen or will fundamental factors prevail. To answer this question one must first recognize that both the financial markets and the economic environment are dynamic.

First, there is a lot of market activity that takes place on a daily basis and will take time to make any definitive moves. Secondly, the Federal Reserve itself continues to adjust its policies with a view to raising interest rates and loosening fiscal policy as well as its balance sheet.

As such, it is too early to be creating any sense of urgency by drawing any conclusions from the market data and charts that are available at present. What is important is that the economic and financial conditions continue to improve over the next few years and this will lead to a general improvement in the US economic outlook.

Therefore, while forecasting what will be in store for the future, it is important to keep in mind that the current period is about the process of adjusting the macroeconomic foundation of the country to better weather a difficult financial situation. In order to create and sustain a positive outlook, there is a need to constantly review the developments over the last two years and apply a corrective strategy to balance the books in accordance with the changing economic conditions.

Indeed, the recent market events have been clearly indicative of a potentially negative impact on business, home foreclosures and retail sales due to uncertainty over the future domestic economies. This is not surprising when one considers that the US dollar is now stronger than ever.

The fundamentals in the overall situation are that financial market participants are clearly taking a long view. As a result, many of them have been comfortable with the idea of the USD/CAD falling further than its present level of stability and are now waiting for a rebound at some point.

In light of this fact, the news that came from the European bank recently indicates that some investors are expecting a dramatic shake-up in the financial markets in the near future. It is therefore not a stretch of the imagination to suggest that there is some serious nervousness about the global economic climate right now.

In addition, there is a large scale risk of a disorderly recession or a global financial meltdown. This can be demonstrated by the recent comments by Euro zone officials that a prolonged recession in the Euro zone is almost inevitable and is unlikely to be averted until at least the end of the year.

Therefore, despite all the uncertainties that are creating fear and anxiety among many investors, the fundamental economic environment is still intact. and the stability of the USD/CAD is not set to change.

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