The U.S. Fed announced the second round of tapering for their bond buying program on Wednesday, a signal the country is ready to wean itself off cheap money. Emerging global economies, however, may not be ready to go cold turkey.
While the latest $10-billion scale back to quantitative easing is a positive sign for U.S. economic growth (it will now spend only $65 billion monthly on its own bonds), such optimism has been somewhat shadowed by a growing worldwide deflation crisis – currency values have dropped around the world, and global stock markets have plummeted $1.7 trillion.
The Global Impact
It’s indicative of just how greatly the U.S. economy impacts the rest of the world – the cost of borrowing there really is the benchmark for global currencies and the accessibility of money in other countries.
When the U.S. kept its monetary policy loose, this in turn benefited these emerging markets – it promoted investment there, and allowed them to keep their own costs of borrowing down and stimulated their economies.
Now that U.S. dollars are a little less free flowing, these countries are seeing their currencies drop. And, unlike in Canada where a weaker dollar can help breathe life into trade, these countries are forced to hike their own interest rates and cost of borrowing to avoid deflation and protect the worth of their currencies. The stock market has also frothed up as investors shed shares from global companies. According to this piece in the financial post, this threatens to wipe out a whole year’s worth of gains built from the banner bull market over 2013.
What About Closer To Home?
Canada’s Loonie has dropped too, weakening to $89.46 cents USD since the start of January. And it could drop even lower – a recent TD analysis says the Loonie could dip as low as 85 cents in 2014.
It’s a good news / bad news situation – a stronger U.S. economy and cheaper prices for Canadian exports will give our trade industry a much needed boost. For those crossing the border, though, it means shelling out big time for American currency.
Will This Round of Tapering Affect Mortgage Rates In Canada?
There are a couple of ways this latest measure will impact the Canadian cost of borrowing. First, it has pushed up demand for government of Canada bonds, internationally renowned for their stability. This has caused yields to drop slightly – five-year yields are down nearly 40 basis points over four weeks. If this trend is sustained longer term, it could lead to cheaper fixed rates, as yields and rates move in tandem.
On the Canadian monetary policy front, an improving U.S. economy can also change the game for inflation levels. Canadian interest rates have been held hostage by subpar inflation growth – but this could reverse somewhat if trade picks up the slack. Canadians choosing to make purchases domestically to avoid pricey exchange rates could also give inflation the perk up it needs to meet its two per cent growth benchmark – the goal the Bank of Canada has indicated will trigger a rate rise, and has forecasted won’t be a reality until 2016.
It’s also not likely that Canada will raise our central interest rate until the U.S. raises theirs – and the Federal Reserve has made it very clear that that won’t be necessary in the short term, stating they expect a “highly accommodative stance of monetary policy to remain appropriate”. Translation? They may be peeling back the layers of their bond buying program, but interest rates – the heart of monetary policy – will remain untouched for quite some time.