Loonieviews October 4, 2013

US Government Shutdown-A Clear and Present Danger

Original post on Saxo Bank’s Trading Floor

The late, great Tom Clancy wrote an entertaining yarn about Columbian drug cartels and the United States called "A Clear and Present Danger", which is an apt title for the current situation in Washington. Initially, the US government shutdown was thought to be just a hiccup in a lively debate between professional politicians. That was last week. It is now evolving into a protracted stalemate between the Democrats, the Republicans and the Republican Tea Party sect which could end up entangled in the debt ceiling debate. Paul Kane, writing in theWashington Post explains how part of the deadlock has to do with House Speaker John Boehner’s tenuous hold on his own job. Meanwhile, President Obama called on Republicans to "end the farce", adding "Congress has to pass a budget that funds our government with no partisan strings attached." That sounds a lot like "my way or the highway", which doesn’t bode well for an early resolution.

Additionally, Treasury Secretary Jack Lew repeated his warning to the leaders of both parties in a letter sent September 25 (publically released October 1) that Uncle Sam will run out of money on October 17. (With a deficit of USD 16.7 trillion, that ship has sailed.) The combination of political deadlock and the rapidly approaching debt ceiling D-Day elevates the previously "unthinkable" possibility of a US government debt default to unlikely, but possible. However, a New York Times story says that Speaker Boehner has told colleagues that he is determined to prevent a federal default.

The recent market focus has been on the political hijinks in Washington, pushing the appointment of the next Federal Reserve chairman to the back burner. It was only a few weeks ago when the reported front-runner, Larry Summers, declined the nomination which put Janet Yellen at the head of the pack; a development that put the US dollar into a tailspin. The perceived as "dovish" Yellen will keep the dollar on the defensive. Furthermore, the government shutdown is increasing the odds that the Federal Reserve Open Market Committee decision on reducing the stimulus program will push back tapering into January 2014, or later.

All of the above made for a rather nervous trading session on Thursday. North American equities closed down while FX trading was understated to say the least. EURUSD and USDJPY flat lined, GBPUSD recovered all its morning losses while the 1.0315—30 USDCAD range remained intact. The US did release initial jobless claims which came in slightly better than forecast at 308,000 but any positive US sentiment was eroded by a lower than expected US ISM non manufacturing report which was down 4.2 points to 54.4. The data appeared to have little impact.

The non-farm payroll report due Friday has been shut down with the other US government services keeping traders attention on the Washington developments and what appears to be the entrenched positions of each side. That should keep the US dollar on the defensive. With the exception of USDCAD, all the majors have gained versis the US dollar in the past week, which may result in US dollar gains on profit taking and position squaring.

In Canada, the IVEY Purchasing Managers Index is expected to show a gain to 52.9 from 51.0 which should keep the lid on USDCAD strength at 1.0335 and perhaps even drive the currency pair below support at 1.0300. Additional USDCAD weakness could be derived from the US dollar Index (USDX). The USDX doesn’t paint a rosy picture for the US dollar following the break of minor support at 80.20 which risks a deeper fall to 79.20. If so, than USDCAD will grind lower to test support at 1.0270.

USDX with downtrend and support

Source: Saxo Bank

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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