In a boon to investors of the USD, the Federal Reserve announced yesterday 18 December 2013 that it would begin to taper its bond buying activities as a part of the current $85 billion stimulus package. In their decision, Federal Open Market Committee of the US Federal Reserve declared that they will reduce their quantitative easing measures by $10 billion. In practice, they will enact these cuts by dropping their purchases of mortgage backed securities and treasury purchases by $5 billion each.
Analysts note that this announcement marks one of the most significant events of the past year in the financial markets. The FOMC`s decision to begin stepping down their intervention in the market implies a number of important markers for the market.
The first thing is that the Fed has shown a renewed confidence in the US economy. By lowering their involvement, they believe that the economy is markedly stronger now, and that it can stand with less support from the monetary policy body. Analysts believe that one of the key metrics on which this decision was made is that of the improved unemployment rate, which is now lower than it has been since 2009. With higher numbers of jobs being added to the workforce, and more consumers having the ability to spend in commerce, they likely believe that the economy will be able to continue on its current course of recovery out of the recession. However, analysts believe that the Fed will keep a watchful eye on how the changes to their monetary policy affect the economy. This move should be viewed as a heavily controlled test before any other reductions are enacted.
Second, this monumental move by the Fed has already had effects on the global market. Stocks in Asia have already reported losses, as have most of the dollar`s rivals in the 16 major currency trading group, including the Aussie, Kiwi, loonie and euro. Only the Yen appears to have made any gains after having struggled against the dollar for the past four months. Currently, commodities are down following the news of the cuts as the markets react. Gold, commonly used as a haven asset in tough times for the dollar dropped after yesterday` gains where some investors bet against the cuts going through at the Fed. Analysts note that as the dollar strengthens, many traders are likely to return to the USD, hurting the value of its rivals and other assets.
Investors are advised to watch for additional fluctuations in the market as the USD improves. Traders have been waiting all year for these cuts and are likely to be extremely proactive in trying to capitalize on them as much as possible. Moreover, all the markets, including stocks, indices, commodities, and currencies will feel the effects and may take some time to return to an equilibrium during this time of volatility.
Canada to Release CPI Report Tomorrow
The Consumer Price Index reports for Canada during the month of November 2013 is set to be issued tomorrow 20 December 2013. At this time, many experts believe that the CPI is likely to rise, while the Core CPI rate should stay constant from the figures from October 2013.
As has been noted in previous reports, the Consumer Price Index report is an important indicator of inflation in the economy. As the CPI measures the cost of a set basket of basic goods, it is sensitive to shifts in prices for consumers. As prices of these items rise or fall, it can affect the spending abilities of the public and therefore influence economic activity in that country or region. Additionally, many economists often prefer to look to the Core CPI report which generally excludes factors such as food and energy because it is less susceptible to small shifts in the market. Thus they are provided with a clearer picture of larger movements in the market that can affect the economy.
Analysts note that the loonie has faced difficulties in recent weeks. Despite the rise in the West Texas Intermediate energy market over the past week or so, the previous decline has hurt the northern country`s economy. While improved oil prices may help out for the December numbers, those figures are yet to be seen. Readers are reminded that the Canadian economy is closely tied to its export of crude oil, much of it to its southern neighbor, the US. Additionally, as discussed in the article above, the announcement that the US Federal Reserve is beginning to taper off its stimulus activities has added further losses to the CAD.
Analysts assess that the loonie may be in for a couple of rough days of trading. Investors are advised to watch for further volatility with the CAD over the next week.
Pound Rises on Improved Employment Figures
It was reported on 19 December 2013 that the British pound had made its biggest leap in the past six weeks after reports show that the country`s unemployment figures had fallen to the lowest levels since April 2009. According to the reports, the pound succeeded in making gains against all of its rivals, albeit before the announcement regarding the cuts to the US stimulus package by the Federal Reserve.
Analysts note that some members of the Monetary Policy Committee in the UK have expressed fears that the increased value of GBP may hurt growth if it outpaces a still slowed global economy. Should the pound become too strong, it may become more difficult to advance exports since they may be to expensive for the international markets.
Additionally, some economists have declared their concerns over inflation, which may lead the Bank of England to raise its interest rates in the nearer future than had been expected by many economists.
Analysts point to a series of positive reports that have been showing up for the UK over the past number of months, adding further confidence to investors that Britain is headed out of its recession. Analysts believe that this trend is likely to continue under the watchful eye of the Monetary Policy Committee as it will attempt to regulate the growth.
Traders should watch for more demand for the pound in the market, despite the massive gains likely to be made for the US dollar in the wake of the Fed`s decision.