original post on Saxo Bank’s Trading Floor
Recap: Last week started with FX markets concerned about a US government shutdown and another Italian government collapse. The former proved well founded while the latter was averted. Month-end and quarter-end flows kicked off a choppy trading week on Monday with USDCAD touching the weeks low at 1.0275 during the "fixing" time and then reversing course to peak at 1.0352 during the early European session on Wednesday. By Friday, USDCAD selling had resumed on profit taking and position squaring ahead of the weekend. Last week’s data releases were overshadowed by the Washington shenanigans with official US government data delayed. On Monday, the Canadian GDP data came in slightly above expectations, increasing 0.6 percent, seasonally adjusted in July but was lost in the US government shutdown rhetoric. The shutdown delayed the US nonfarm payrolls release (NFP) putting the spotlight on Wednesday’s ADP employment report. (gain of 166,000 versus consensus 180,000) The report disappointed and served to add to the US dollars woes.
The week ahead: The US dollar is starting the week on the defensive, under pressure due to the presumption of a prolonged US government shutdown hurting the economy and delaying the onset of the widely anticipated tapering program. The US political situation appears to have worsened over the weekend with House Republican Speaker John Boehner saying that "the votes are not in the House to pass a clean debt limit (one with no conditions attached) and the president is risking default by not having a conversation with us". President Obama refuses to negotiate anything until the budget issue is resolved. This impasse will keep the US dollar on its heels until October 17 when according to the Treasury Secretary, the US will default on its debts. Then it should just collapse.
There is a decent amount of data due from Canada this week. In the current bearish US dollar environment, positive Canadian data releases could lead to an acceleration in USDCAD selling.
Tuesday: September Housing Starts — forecast 175,000 year over year. August Merchandise Trade — forecast negative 0.7 billion vs. minus 0.9 billion in June
Friday: Labour Force Survey — forecast gain of 15,300 jobs. As usual a very choppy data series and the market is looking for payback from last month’s stellar 59,200 gain
The US data is a mixed bag as there are not any official releases until the government is reopened putting the onus on independent research to guide markets. This will include Johnson Redbook on Tuesday and the Reuters Michigan Consumer confidence survey on Friday
Source: Saxo Bank
Upcoming Data -United States
Source: Saxo Bank
The USDCAD technical Picture: The USDCAD short term technical picture is neutral within the existing 1.0275—1.0350 trading range, needing a break either side to extend another 0.0070 points. The currency pair seems content to oscillate between the 100—day and 200—day moving averages (1.0362 and 1.0233, respectively). Longer term, the USDCAD uptrend from September 2012 remains intact, providing one overlooks the September 18, 2013 breach of the trend line, chalking it up to a "spike". For this week, it looks like the US dollar uptrend from mid-September was broken on Friday with the move below the 1.0315—20 area which should revert to resistance this week. A break below 1.0275—80 should lead to 1.0250 and then 1.0210.
USDCAD 4-hour chart shows uptrend line break
Source: Saxo Bank
This week’s perspective: The Canadian dollar is benefitting from the US government shutdown and is poised to scratch out further gains as the stalemate progresses. The shutdown means that the Federal Open Market Committee (FOMC) minutes is the new NFP, potentially being the catalyst for a big dollar move. The longer that the Republicans and Democrats play their version of truth or dare the better the odds that the US economy is negatively impacted resulting in the FOMC continuing with its quantitative easing program well into 2014. Fed chairman Ben Bernanke declined to comment on monetary policy last week during a speech in St Louis but he is on record as saying that the budget and debt ceiling issues were a concern. We get to find out just how concerned on Wednesday with the release of the FOMC minutes. The minutes may also result in another outbreak of volatility depending upon how hawkish or dovish they read, considering that the committee did say the decision not to taper was close. However, it is more likely that even if it appeared that a tapering decision was close, the government shutdown would support a delayed start to tapering.