Recap: The spectre of a government shutdown hung over markets like the sword of Damocles with US politicians of both stripes puffed up in feigned indignation over the other side’s proposal’s (or lack thereof) for the Continuing Resolution bill. With no progress by Friday, markets were drifting into risk aversion. Once again, the US delivered a mixed bag of economic data which did nothing to provide any additional clarity to the tapering debate. New home sales rose 7.9 percent erasing the July drop which suggests modest improvement. US durable goods squeaked out a 0.1 percent beating the consensus of zero percent and reignited some US growth concerns. US jobless claims delivered a pleasant upside surprise coming in at 305,000 versus estimates of 325,000, giving a lift to equities and commodities. FX traders ended the week nervously eyeing a shift to risk aversion due to the increase in inflammatory rhetoric from US politicians suggesting a shutdown was becoming inevitable.
The week ahead:The US nonfarm payrolls report is due Friday and this release usually ensures quiet markets and narrow ranges as traders await the data. This week is likely to be different. The apparently "inevitable" shutdown of the US government will shift flows into risk aversion. The impact of normally important data releases, such as Canada’s July GDP and the US ISM Manufacturing PMI will be overshadowed by headlines.
Upcoming Data for Canada
Source: Saxo Bank
Upcoming Data for the United States
Source: Saxo Bank
The key data from Canada will be July GDP which is expected to rebound to 0.5 percent from a drop of 0.5 percent in the previous month. This should help to cap any Canadian dollar weakness around 1.0335-50.
The most important data from the US is Friday’s non-farm payrolls report. The consensus is for a gain of 180,000 jobs. This month’s release will have a much more diminished impact than the August number due to tapering expectations being pushed back until the new year.
Tuesday’s ISM Manufacturing PMI for September is forecast at 55.8 which is virtually unchanged from the previous month.
The USDCAD technical picture
The USDCAD short term technical picture is mixed. USDCAD bulls see a short term uptrend above 1.0290 targeting a break of the 1.0335-50 resistance area to extend gains to 1.0420. USDCAD bears see the bounce from 1.0180 as aggressive but still corrective, while trading below the 1.0335-50 resistance zone. Longer term, the USDCAD appears to still be in a long-term uptrend from September 2012 which comes into play at 1.0215 if one decides that the two day dip to 1.0180 is just an aberration.
Daily USDCAD chart with uptrend from September 2012
Source: Saxo Bank
This week’s perspective
The week will start off dominated by political developments in Washington but for many FX traders, the desire to hug the sidelines on Monday will be complicated by larger than normal fixing flows due to quarter and month end. Portfolios get rebalanced according to the "fix rates" posted by WM/Reuters (11: am Toronto time, 4: pm UK time). Some traders are suggesting that the flows will be dominated by US dollar selling versus the majors except USDJPY.
The risk of a US government shutdown has escalated this weekend and the financial media is in a froth predicting dire consequences for the US economy. (For any who want to know more about whom and what is affected, click this link to the Washington Post) In my opinion, all the chatter about the US government shutdown is just a "reality distortion field" and traders risk making bad decisions because of it. If the government shuts down, it will restart-that’s a given. People (not politicians) will be greatly inconvenienced but only for a very brief time. Some pundits suggest that a government shutdown probably ensures that the debt ceiling issue will be dealt with, avoiding a default. Despite what Washington believes, it is only one of many centers of the universe. There are other events occurring to drive markets particularly the European Central Bank interest rate decision and press conference on Wednesday which will give rise to speculation around Long Term Refinancing Operations (LTRO)
I think that the expected month end/quarter end rebalancing flows should trump risk aversion stemming from the manufactured political crisis in the US. If so, US dollar weakness against the majors (except for the JPY) will occur, but it may only be a temporary phenomenon. However, it could provide great entry levels for long dollar positions leading up to Friday’s non-farm payrolls.