USD/CAD – Loonie Swoons As Fed Pulls Taper Trigger

USD/CAD jumped over one cent on Wednesday, following the announcement that the Federal Reserve would taper its QE program by $10 billion each month, commencing in January. The Canadian dollar has steadied on Thursday, as the pair trades just above the 1.07 line early in the North American session. In Thursday’s economic news, there are no Canadian releases. Over in the US, Unemployment Claims were much higher than expectations for the second straight week. We’ll get a look at two other key events, Existing Home Sales and the Philly Fed Manufacturing Index, later in the day.

After months of standing on the sidelines, Federal Reserve Chairman Bernard Bernanke finally played his hand on Wednesday. At its policy meeting, the Fed announced that it was tapering its QE program by $10 billion a month, commencing in January. This will reduce the Fed’s asset purchases to $75 billion every month, comprised of $40 billion in Treasuries and $35 billion in mortgage bonds. The announcement came as somewhat of a surprise, as most analysts had expected the Fed to hold off on any QE reductions until early next year. The currency markets reacted sharply to the news, as the Canadian dollar lost over 100 points, as USD/CAD closed above the 1.07 level.

In its dramatic taper announcement, the Federal Reserve was careful to separate tapering from rate hike expectations. Fed chairman Bernard Bernanke stated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%. Previously, the Fed had stated that it would start to consider rate increases when unemployment fell below this level. Bottom line? With the unemployment rate at 7.0%, it could be a while before we see higher interest rates in the US.

Meanwhile, Unemployment Claims suffered another dismal release. The key indicator jumped to 378 thousand claims last week, up from 368 thousand the week before. This was well above the estimate of 336 thousand. Last week’s weak numbers were attributed to the holiday season, but two consecutive bad releases will certainly not comfort to the markets.

Overshadowed by the Fed’s bombshell announcement, a two-year, bipartisan budget agreement is  sailing through Congress. The deal was overwhelmingly approved in the House of Representatives last week and the Senate followed suit on Wednesday, passing the measure by a vote of 64-36. The bill will now go the President Obama for his signature before becoming law. The agreement sets limits on government spending for two years and reduces the deficit by a modest $23 billion. Democrats and Republicans both had criticism of the proposal, but there is general agreement in Washington that the compromise reached is a positive step which removes the threat of a shutdown which paralyzed the government in October for 16 days.

USD/CAD for Thursday, December 19, 2013

USD/CAD December 19 at 14:45 GMT

USD/CAD 1.0701 H: 1.0728 L: 1.0698

USD/CAD Technical

• USD/CAD has settled down in Thursday trading after sharp gains the day before, and has traded slightly above the 1.07 line for most of the day.
• On the downside, 1.0652 has reverted to a support level following the strong gains by the US dollar. This is followed by support at 1.0573.
• 1.0783 is providing resistance. This is followed by a resistance line at 1.0852, which has remained intact since October 2009.
• Current range: 1.0652 to 1.0783

Further levels in both directions:

• Below: 1.0652, 1.0573, 1.0502, 1.0442 and 1.0337
• Above 1.0783, 1.0852, 1.10 and 1.1094

OANDA’s Open Positions Ratio

USD/CAD ratio has reversed directions in Thursday trading, pointing to gains in short positions. This is reflected in the current movement of the pair, as the Canadian dollar has posted slight gains against the US currency. A majority of the open positions in the USD/CAD ratio are short, indicating a trader bias towards the Canadian dollar gaining further ground.

The Canadian dollar has posted slight gains on Thursday but remains above the 1.07 level. We could see some activity from the pair during later in the North American session, as the US releases key housing and manufacturing data later in the day.

USD/CAD Fundamentals

• 13:30 US Unemployment Claims. Estimate 336K. Actual 379K.
• 15:00 US Existing Home Sales. Estimate 5.04M.
• 15:00 US Philly Fed Manufacturing Index. Estimate 10.3 points.
• 15:00 US CB Leading Index. Estimate 0.7%.
• 15:30 US Natural Gas Storage. Estimate -260B.

*Key releases are highlighted in bold

*All release times are GMT

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