Bernanke/Poloz preview: "The biggest day of the month, if not for the next several months"
I’m not sure if it was done this way by design, but the practical impact of the public difference of opinion among FOMC members regarding the QE tapering issue has the FX market going in to tomorrow’s decision thoroughly confused.
At the same time, market participants have now thought through many scenarios so I don’t think the market will be surprised by any outcome. However, a decision to taper would still lift the USD against all currencies. I think it would bring a quick return to 1.04 in USDCAD.
Like most market participants, I doubt the FOMC will taper today but I think it may well hint that taper is likely to begin at the July 31 meeting. Any such hint is more likely to come via Bernanke’s press conference remarks than from the published statement.
Interest in Bernanke’s press conference has grown after last night’s hint from President Obama that Bernanke is unlikely to stay for another term as Fed Chairman. Bernanke will undoubtedly get grilled by the press on his future plans. Obama’s hint sort of smacks of being part of a communication strategy on the transition issue.
I expected Bernanke to say he wasn’t coming back some time around August. The fact that Obama brought this issue forward by a month or two makes me wonder if Bernanke might want to leave the Fed before the official end of his term on January 31, 2014.
If he is going back to Princeton, he may want to resume teaching in January. I believe that Bernanke would do his successor a huge favor by getting QE taper underway before that individual is named. If QE tapering is a controversial pending topic during the selection process for the new Chairman or during the confirmation hearings then the Fed will see QE become further politicised. Historically the Fed has tried to avoid politicisation as much as possible. This factor may be more important than employment numbers for taper timing.
If the FOMC does choose to taper sooner, the kneejerk response will be a stronger USD. However, keep an eye on other nuances and be wary of whipsaw moves. A hint that the Fed will taper sooner for transitional reasons can be dampened by communicating that taper will consequently be a more gradual process.
Communication of a summer taper can also be dampened by assuring markets that there will be a long delay between the end of QE3 and the beginning of rate hikes. However, these detail issue would probably come out a few questions after Bernanke’s comments on taper timing and his comments on his future, if he chooses to respond to questions on that issue.
On the other side of the border, the transition is already complete. Stephen Poloz has been on the job for a couple of weeks. He inherited a situation where policy does not absolutely need to change any time soon.
However, if Poloz wants to start a new path, the present economic situation provides flexibility to drop key elements of the policy statement, like the soft tightening bias. There is also flexibility to either drop or magnify the BoC’s long-standing discussion of the “persistent strength of the Canadian dollar.” If Poloz wanted to make such tweaks to the next policy statement, he might hint as such in his speech tomorrow.
However, I don’t expect Poloz to change the statement, so I don’t expect any hints. This is also the view of our economists and market consensus from what I can tell. However, FX markets need to be aware that the possibility of a surprise is out there and that it could complicate Bernanke’s impact on USDCAD relative to the broader USD due to the timing shown below.
12:25 EDT Text of BoC Governor Poloz’s prepared remarks will be published
12:40 EDT Governor Poloz begins delivering his speech
14:00 EDT FOMC statement published
14:00 EDT Forecasts of FOMC participants released
14:15 EDT Governor Poloz begins press conference with live Q&A
14:30 EDT Fed Chairman Bernanke begins press conference with live Q&A