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BoC’s Murray: Fed tapering won’t affect Canadian economy

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BoC’s Murray: Fed tapering won’t affect Canadian economy

The eventual end of one of the most aggressive stimulus measures in US history won’t have an adverse effect on the Canadian economy, according to Bank of Canada Deputy Governor John Murray. Earlier in the week Murray responded to critics who say the Canadian economy will face serious damages after the United States Federal Reserve decides to taper and eventually remove its $85 billion in monthly asset purchases. According to Murray, a gradual unwinding of QE3 will coincide with a strengthening US economy, which will be to Canada’s benefit.

As Canada’s largest trade partner, the United States plays a central role in the Canadian economy. For Murray, the pros of a stronger US economy far outweigh the downside risks for Canada. Higher interest rates will create a drag on global markets, but will eventually generate more external demand. When coupled with a relatively weaker Canadian dollar and higher commodity prices, US recovery could provide the lift the global economy needs in this age of volatility.

The Canadian economy has felt the pinch of global volatility in 2013. Declining demand from emerging markets, combined with weak commodity prices and domestic instability, have forced market participants to rethink their outlook on Canada.

Wall Street expects a gradual reduction to the Fed’s quantitative easing program as early as September, with a complete rollback of federal bond buying in 2014. The Federal Reserve’s balance sheet has swelled to more than $3.5 trillion since quantitative easing was first announced back in 2009.

A snapshot of the North American markets suggests two economies headed in opposite directions. Unemployment in Canada is has risen, whereas job growth south of the border is hitting multi-year highs. Over the long-term, however, Canada will feed off a stronger US economy. The two countries currently have the largest trade relationship in the world. In 2012, US merchandise trade with Canada amounted to $324.2 billion in imports and $292.4 billion in exports.

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