With the markets lowering expectations for Federal Reserve Chairman Ben Bernanke’s highly-awaited speech in Jackson Hole today, the US dollar is perceived to gain alongside its Canadian counterpart. Investors are likely to digest every statement by Bernanke, listening for any hints regarding future monetary policy plans by the central bank. For months, the markets have debated on whether the Fed is ready to carry out another round of bond-buying to boost the economy. Nevertheless, most analysts believe that he is unlikely to definitively signal new steps to in part because of slightly encouraging economic data recently.
The Fed faces huge economic challenges, including a protracted period of unemployment higher than 8 percent, a country facing a looming fiscal cliff and continuing threats from the European debt crisis. In its last meeting, Fed policymakers concurred that they were prepared to act soon unless incoming data pointed to a sustainable strengthening. Since then, economic data have revealed that the economy expanded at 1.7 percent, slightly faster than previous estimated. The housing market also continues its recovery, with Pending Home Sales hitting a two-year high and house prices stabilizing. Yesterday, the US Commerce Department reported that Americans increased their spending for the first time in three months in July as incomes rose and job prospects improved. Today, manufacturing reports from the US are foreseen to further improve sentiment. The total value of new purchase orders placed with manufacturers is deemed to have inclined by a strong 1.7 percent in July, bouncing back strongly from the 0.5 percent contraction recorded in the previous month. Likewise, the Chicago PMI is seen to hold near a three-month high this month with a score of 53.6 points, suggesting that factory conditions in the area remain expanding.
The strength of such positive trends, however, remains a topic of debate. The August jobs report due on September 7 will likely be vital to the Fed’s decision-making. Hence, although Bernanke is likely to acknowledge the still fragile state of the economy and express that the Fed is actively considering additional options including monetary easing, the Fed chief could disappoint by stopping short from there. Likewise, the title of his speech is “Monetary Policy since the Crisis,” a sign that he is apt to take a lessons learned approach rather than outline future steps. With investors likely to walk away disappointed today, the Greenback is seen to benefit on risk-off trades, warranting a long position on the USD/CAD.
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