USD/CAD: Fed Expectations and Obama Compromise Weaken US Dollar

The Federal Reserve is expected to announce today an expansion of its asset purchases program that is likely to weaken the valuation of the US dollar versus the Canadian currency. Hopes also continue to rise as talks concerning a fiscal cliff deal are believed to be making progress.

A risk rally has been powering the markets on speculation that the Fed will add Treasury purchases to an existing program that buys $40 Billion in mortgage bonds each month. Reports that Athens was able to meet its bond buyback target are also pushing the demand for risk. Further, a jump in German investor confidence this December has likewise provided support for the increase in the demand for higher-yielding assets.

A Bloomberg survey of economists states that the Federal Open Market Committee will announce a decision to amplify record accommodation in monthly Treasury buying that will push its balance sheet to almost $4 Trillion. The central bank is scheduled to end Operation Twist this month. The program swaps $45 Billion of short-term Treasuries each month for longer-term government debt, which has kept the total size of the balance sheet unchanged. The monetary policy panel pledged in October to continue that plan until the labor market improves “substantially.”

Moreover, as reported by Bloomberg and according to a Republican congressional aide and an administration official, President Barack Obama and House Speaker John Boehner traded another round of offers and inched toward a budget agreement. Though either side remains hundreds of billions of dollars apart on taxes and spending, it was reported that Mr. Obama is willing to drop his revenue demand to $1.4 Trillion from $1.6 Trillion. In an interview with ABC yesterday, Obama said he was willing to make difficult choices on spending, provided Republicans concede on taxes. They continue to disagree on whether a year-end deal should include an increase in the debt limit and fresh programs to boost the economy, but any signs of progress can be seen as positive at this stage of the fiscal cliff drama.

A short position is advised for the USDCAD, as the risk rally is perceived to extend today. Be careful of probable technical price corrections, however.


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