USD/CAD – Little Movement as Markets Monitor Fiscal Cliff

The markets are back in action after a short break for the Christmas holidays. USD/CAD continues to drift, slightly above the 0.99 line. Although the final trading week of the year has been uneventful so far, that could change quickly, as the fiscal cliff talks go right down to the wire. Traders should thus be prepared for some volatility in the currency markets. US Unemployment Claims came in well below the forecast. There are two additional key releases on Thursday, CB Consumer Confidence and New Home Sales. There are no scheduled Canadian releases this week.

In Washington, Congress reconvenes on Thursday and the tough negotiations over the fiscal cliff will continue. It’s clearly crunch time in Washington, with the fiscal cliff deadline only a few days away. Still, the finger-pointing and tough rhetoric between the sides shows no sign of abating. On Sunday, Republican Senator John Barrasso took a shot at the Democrats, suggesting that President Obama “sensed victory at the bottom of the cliff”. At the same time, both sides realize that the stakes are very high, and the economy could take a beating if nothing is done. If the Democrats and Republicans don’t find some common ground, tax hikes and spending cuts worth some $650 billion will go into effect on January 1.

This double-jab could send the economy reeling and push the US into a recession in 2013. Can the two sides hammer out an agreement? The markets are hoping that at the very least, some type of stop-gap measure can be reached before the deadline. This would provide some breathing room while negotiations for a comprehensive deal continue, and hopefully calm down the jittery markets. Will the fiscal crisis have an impact on USD/CAD? Most likely, it will. An agreement would probably be dollar negative, as investors would feel more comfortable taking more risk. Conversely, if there are no signs of progress, market sentiment will sour and investors will flock to the safety of the US dollar.

Taking a look at fundamentals, there were two releases out of the US on Wednesday. The S&P/CS Composite-20 HPI, an important housing inflation index, continued its recent upward swing, with an excellent 4.3% gain. However, the Richmond Manufacturing Index dropped to 5 points, well below the market forecast of 12 points. Thursday releases got off to good start, as Unemployment Claims rebounded from last week and easily beat the market forecast. There were 350 thousand new claims, well below the estimate of 365K. If today’s other key releases from the US beat the estimate, we could see the US dollar get a lift. With no scheduled releases out of Canada until next week, the main items to keep on eye on are the US releases and the fiscal cliff, as these could have a major impact on the movement of USD/CAD.

USD/CAD for Thursday, Dec 27, 2012

Dec 27 at 13:30 GMT

0.9920 H: 0.9940 L: 0.9909

USD/CAD Technical

S3 S2 S1 R1 R2 R3
0.9812 0.9845 0.9909 0.9943 1.00 1.0041

USD/CAD continues to show very little movement, as seen by the proximate support and resistance levels, which have remained in place for several days (S1 and R1 above). There is weak support at 0.9909, but this line could continue to hold if the pair’s drifting continues. There is stronger support at 0.9845. Friday. On the upside, 0.9943 is the next line of support. The pair did briefly break above it, but then retracted. The next resistance line is the important parity level.
• Current range: 0.9909 to 0.9943.
Further levels in both directions:
• Below: 0.9909, 0.9845, 0.9812, 0.9767, 0.9625, 0.9526 and 0.9445.
• Above: 0.9943, 1.00, 1.0041, 1.0157 and 1.0252.

OANDA’s Open Position Ratios
The USD/CAD ratio has not shown much movement in the past few days, and we can expect this lack of movement to continue if the pair continues to trade in a narrow range. The bias remains strongly in favor of long positions, as trader sentiments favors a weakening of the loonie against its US cousin. USD/CAD has edged higher in Thursday trading, but it remains too early to tell if the pair will breakout and move upwards, or remain boxed in a narrow range.
We could see a move towards parity if US key releases continue to be positive. However, all bets could be off if there is an unexpected agreement regarding fiscal cliff, which would be US dollar negative, as the markets would get a boost and investors would be more comfortable with increased risk. If no agreement is reached, the markets jitters will get worse, and we could see a flight towards to safety of the US dollar, at the expense of the loonie.

USD/CAD Fundamentals

• 13:30 US Unemployment Claims. Estimate 365K. Actual 350K.
• 15:00 US CB Consumer Confidence. Estimate 70.3 points.
• 15:00 US New Home Sales. Estimate 382K.
*Key releases are highlighted in bold
*All release times are GMT

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.