USD/CAD – Canadian Dollar Under Pressure As Trade Deficit Widens

USD/CAD has posted modest gains on Tuesday, trading in the low-1.03 range late in the European session. After a horrific Building Permits release on Monday, Canada’s trade deficit hit its highest level in 2013. There was better news from Housing Starts, which were up substantially in September. Over in the US, there are only two minor releases today, so the markets will be shifting focus to the FOMC minutes, scheduled for release on Wednesday. The shutdown has now reached Day 8, amid little indication that the crisis will end anytime soon.

Canada’s Trade Balance, a key indicator, didn’t impress in September, as the trade deficit widened to $-1.3 billion, up from $-0.9 billion in August. It was the largest trade deficit this year, reflecting trouble in the critical export industry. There was better news from the housing sector, as Housing Starts jumped to 194 thousand in September, compared to 180 thousand the month before. The estimate stood at 175 thousand. This follows a weak Building Permits release, which posted a steep decline of -21.2% in September. This was the sharpest drop since May 2007.

The US government shutdown enters its second week on Tuesday, and there is no progress to report out of Washington. Democrats and Republicans continue to play the blame game as the government remains paralyzed, without funds to operate. Republicans had demanded that the Democrats delay implementation of the 2010 health care act, known as Obamacare, before agreeing to pass a budget. The Democrats have refused, saying the budget must first be passed before any discussions can be held. There are increasing concerns that a prolonged shutdown will hurt the US economy. If the shutdown does continue, we could see some instability in the markets this week, and the US dollar, which is already under strong pressure, could lose ground.

As political squabbling has held up the US budget, a far more serious crisis is lying just around the corner – the debt ceiling. The US has a debt worth $16.7 trillion, and will run out of funds to service the debt by October 17, unless Congress authorizes raising the debt ceiling. Otherwise, the US could potentially default on its obligations, which could cause chaos in the markets. A US default has not been priced in the markets, and such a cataclysmic event has never happened. With just 10 days until the ceiling is reached, we could see the markets get restless if the politicians in Washington don’t get their act together quickly.

Most analysts predicted that the Federal Reserve would taper QE in September, and the markets were caught by surprise when the Fed balked and maintained the levels of the bond-buying program at $85 billion/mth. However, the landscape has changed dramatically in the past few weeks, with the budget deadlock in Washington as well as growing fears about a debt ceiling crisis. Meanwhile, distortions and delays in key economic data will make it difficult for investors to gauge what the Fed is planning. On Friday, Non-Farm Payrolls and the Unemployment Rate were cancelled, and further data will have to be postponed as the shutdown continues. The FOMC minutes will be released on Wednesday, and this event is often a market-mover, so we could be in for some volatility in the currency markets.

USD/CAD for Tuesday, October 8, 2013

USD/CAD October 8 at 13:50 GMT

USD/CAD 1.0326 H: 1.0334 L: 1.0308

USD/CAD Technical

• USD/CAD has moved higher on Tuesday, with the Canadian dollar under pressure.
• The pair is putting pressure on the resistance line of 1.0337. This is followed by a strong resistance line at 1.0442.
• USD/CAD continues to receive support at 1.0282. This is followed by a stronger support line at 1.0224.
• Current range: 1.0282 to 1.0337

Further levels in both directions:

• Below: 1.0282, 1.0224, 1.0158 and 1.0068
• Above 1.0337, 1.0442, 1.0502, 1.0573 and 1.0652

OANDA’s Open Positions Ratio

USD/CAD ratio is unchanged in Tuesday trading. This is not reflected in the current movement of the pair, as the US dollar has posted gains against its Canadian counterpart. The ratio continues to be made up of a majority of long positions, indicative of a trader bias towards the US dollar continuing to move higher.

USD/CAD has posted modest gains, as key Canadian releases continue to disappoint. With no major releases out of the US today, any moves during the North American session are likely to be limited in nature.

USD/CAD Fundamentals

• 12:30 Canadian Housing Starts. Estimate 175K. Actual 194K.
• 12:30 Canadian Trade Balance. Estimate -0.7B. Actual -1.3B.
• 11:30 US NFIB Small Business Index. Estimate 95.2 points. Actual 93.9 points.
• 14:00 US IBD/TIPP Economic Optimism. Estimate 46.2 points.

*Key releases are highlighted in bold

*All release times are GMT

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