A surprise ahead?
Today is a critical day for North American monetary policy, starting with the Bank of Canada (BoC) rate decision at 9:45 am ET, followed by the US Federal Reserve this afternoon. FX markets appear to have subtly repositioned ahead of the BoC announcement, with the recent drop in USD/CAD from 1.40 to 1.394 potentially signaling a shift in anticipation toward a hold. Is a surprise ahead of us?
The primary rationale for a BoC pause centers on inflationary pressure and policy effectiveness. September’s CPI accelerated to 2.4% from 1.9%, driven by faster gains in essential items, with price pressures proving broad-based and expectations remaining near the upper limit of the 1–3% target range. This outcome injects significant doubt into the case for immediate stimulus, suggesting the fight against inflation is not yet fully won. The argument for caution is further bolstered by the policy setting itself: the real policy rate is already near zero, placing it within the estimated neutral zone while financial conditions remain broadly accommodative. Given the inherent policy lag, the BoC may prefer to pause, fully assess the cumulative impact of earlier cuts, and avoid risking over-easing. The outlook is also complicated by persistent structural cost pressures, from labor settlements to supply chain restructuring, and lingering fiscal uncertainty, which means the BoC is highly likely to stress that its policy path remains contingent on incoming data.
Conversely, the argument for an immediate cut remains robust. The Bank’s prior justification for easing is supported by data indicating that economic slack is continuing to accumulate. Elevated trade uncertainty further increases the risk that inflation could ultimately undershoot the Bank’s forecast. Moreover, Governor Macklem’s dovish leaning and consistent emphasis on the health of the labor market provide a strong foundation for immediate action. Given that a single cut rarely delivers its full impact and is often followed by further cuts, a proactive move now would demonstrate the Bank’s commitment to stabilizing growth and addressing downside risks.
A surprise hold carries significant market implications, as it would amplify yesterday’s USD/CAD move, strengthening the CAD against deeply-priced easing expectations. A cut, however, would likely send the currency back toward the 1.40 mark. Overlaying this domestic decision is the concurrent US Fed news regarding the end of Quantitative Tightening (QT). Whether the end of QT translates into a softer US Dollar depends entirely on market interpretation. If the injection of liquidity is viewed as confirming the “risk-on” rally and easing global financial conditions, it would typically weigh on the safe-haven dollar. However, the dollar has shown resilience amid persistent repo market stress headlines. Therefore, a confirmation of the end of QT might be interpreted as a technical adjustment necessary to keep the Fed’s policy framework functioning smoothly, rather than a definitive sign of future monetary easing, potentially limiting the downside risk for the dollar. Regardless of the immediate outcomes, in the medium-term, the trajectory points toward a convergence of US and Canadian policies, which could provide a push for the CAD.
A guaranteed rate cut, but what about QT?
Today’s FOMC meeting is poised to deliver a widely-expected interest rate cut, but it’s also shaping up to be a pivotal moment for the future of Quantitative Tightening (QT). After nearly three years of shrinking its balance sheet, the Fed may be ready to hit pause. Analysts and traders are watching closely to see whether the Fed will officially end QT now or wait until December. Either way, the signs are mounting that this chapter of monetary policy is nearing its conclusion.
QT began back in June 2022 as a way to unwind the massive balance sheet expansion that followed the COVID-19 crisis. Since then, the Fed has let over $2 trillion in bonds roll off, draining liquidity from the financial system. But lately, that drain has started to pinch. Short-term funding markets are flashing red: SOFR, the key secured borrowing rate, has occasionally spiked above the Interest on Reserve Balances (IORB) rate and the effective federal funds rate (EFFR), a classic stress signal that reserves are becoming scarce. Furthermore, banks have increasingly tapped the Fed’s Standing Repo Facility (SRF), a permanent liquidity backstop, at levels not seen outside of quarter-end periods since the pandemic.
These are red flags the Fed cannot ignore, creating the risk of a repeat of the 2019 repo crisis when overnight lending markets seized up. Fed Chair Jerome Powell recently hinted that reserves could reach “ample” levels in the coming months, which many took as an official signal that QT’s end is imminent. Meanwhile, a massive trade in SOFR futures suggests at least one big player is betting on a swift return of liquidity, something that would only happen if QT wraps up soon.
The Fed’s policy response could be two-pronged: ending QT addresses the quantity of reserves in the system, while trimming the SRF minimum bid rate addresses the price of that liquidity, ensuring money market rates stay firmly anchored to the central bank’s desired target range. This dual action might be necessary to stabilize funding markets and affirm the Fed’s control.
If QT ends, and especially if the Fed signals a future intention to grow its balance sheet to meet rising structural demand for cash (deposits and currency), it could give risk markets a meaningful boost. It’s crucial to note this is not a return to Quantitative Easing (QE), but a necessary technical adjustment to an ‘ample reserves’ operating framework. However, should the Fed signal a need for ‘bill purchases’ in early 2026, a move known as Balance Sheet Organic Growth, or even temporary operations like TOMOs (temporary open market operations) it would still serve as a powerful policy signal, similar to the impact of the temporary operations seen during the 2019 repo crisis.
Dollar falls to one-week low ahead of Fed meeting
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Calendar: October 27-31
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
