See original on Saxo Bank’s Trading Floor
The Made in America drama playing out in Washington by the 432 members of the Senate and House of Representatives has elevated financial market insecurity to a new high. President Obama and his Democratic party believe that since the health care reform act has already been passed that the Republicans (goaded on by their rightist Tea Party faction) have no right to hold the government hostage so as to reopen the debate. The president equates their actions to demanding a ransom, and he probably has a point. That said, the chances of an eleventh-hour reprieve have faded and it looks like Uncle Sam will hang his "Gone Fishin’ sign on the doors of the US Capital.
What about the rest of the world?
Japan: American politics are laying a smoke screen across events in Japan and Europe. Japan will raise its consumption tax to eight percent with an economic stimulus package of up to JPY five trillion. This action has been widely expected but recent actions have taken USDJPY off its highs. The tepid shift into risk aversion trades due to the feared US shutdown and the Japanese yearend position adjustments and repatriation has driven USDJPY lower. The removal of the shutdown threat should reignite the dollar’s upside.
Australia: The Aussies got a new government and the AUDUSD has bounced off its lows of .8850 in part due to improved Chinese data. However, the Reserve Bank of Australia (RBA) could still cut interest rates to help jump start the economy which is recovering from weak commodity demand. The RBA is widely expected to leave rates unchanged today but the statement may provide clues of a November move. (See this morning’s RBA statement here)
Eurozone: Germany’s Angela Merkel still needs to form a government and Italy appears to want to get rid of one. There is a school of thought that the European Central Bank (ECB) would launch a third long-term refinancing operation in the coming quarter which would undermine EURUSD. More immediately, the ECB rate decision is Thursday but nothing is expected to happen, leaving ECB President Draghi’s press conference a possible flash point.
And now back to Canada
The September quarter-end and month-end follies were in high gear on Monday as the rumoured "left-hand side" fixing flow proved true. USDCAD started the morning trading defensively above 1.0300 but that level crumbled on a modestly better Canadian retail sales report. Concerns about a US government shutdown permeated trading but risk aversion dollar buyers ran into hefty demand for Canadian dollars at the fix. (11:00 am Toronto, 4:00 pm London). This quarter-end USDCAD selling couldn’t overcome support in the 1.0275 area and just after the clock ticked 11:00 am, the USDCAD got a bid, recovered above 1.0300 and hasn’t looked back.
Today’s Canadian real GDP printed 0.6 percent in July, fully reversing the negative 0.5 percent June swoon but economists have pointed out Q3 growth will still struggle to achieve a 2.0 percent annual rate.
There isn’t any Canadian data on tap today but the US will more than fill the void (assuming the government is open and the data gets released). The most important data is the ISM Non-Manufacturing Activity Index for September. The consensus is for a slight dip to 55.0 from 55.7 posted in August. This may be just payback for the extra strong print in August.
The short-term USDCAD technicals are bullish while trading above 1.0270, looking for a break of the 1.0335-60 resistance zone for an extension to 1.0420. In addition, the break of minor resistance at 1.0315 on the hourly charts also argues for a 1.0360 test. A move below 1.0300 suggests a retest of 1.0270.