USD/CAD – Drifting Continues as Market Braces for Cliff

USD/CAD continues to drift as we wrap up an abbreviated trading week following the Christmas holiday. With little progress to report on the fiscal cliff talks, hope is fading fast that a deal can be reached before the January 1 deadline. There was mixed market news out of the US on Thursday, as CB Consumer Confidence, and New Home Sales both fell below the estimate. However, Unemployment Claims looked sharp, as the key employment indicator easily beat the forecast. Today’s highlight is US Pending Home Sales, which comes on the heels of Thursday’s New Home Sales. The other US releases are Chicago PMI and Natural Gas Storage. There are no Canadian releases scheduled for Friday.

With the fiscal clock ticking ever louder, the impasse on Capitol Hill shows no signs of a last-minute breakthrough. After all the rhetoric, mud-slinging and finger pointing, Republicans and Democrats must try to find common ground and show more flexibility if the fiscal cliff is to be averted. If the sides can’t get their act together before January 1st, some $650 billion in tax hikes and spending cuts will automatically kick in. This double-jab could stifle the nascent economic recovery and push the US economy into recession in 2013. The core of the fiscal cliff, crisis, which has been festering for months, is that the Democrats and Republicans have vastly different approaches to how to deal with spending cuts and tax hikes.

As far as news taxes, the Republicans are very much against the idea, and have reluctantly agreed to tax hikes on those earning $1 million or more. They have balked at proposals from the Senate and the White House, both under Democratic control, to raise taxes on individuals earning $250,000 or more. The two sides are also far apart on spending cuts, with the Republicans favoring deep, across-the-board cuts to federal spending. The Democrats are unwilling to discuss cuts to major programs such as Medicaid and Social Security. Negotiations between the sides are at a stalemate, and on Thursday, Senate Majority Leader Harry Reid warning that the US was headed over the cliff unless the Republicans gave up some ground on tax hikes. Negotiations will continue on Friday and the weekend, but the two sides continue to dig in their heels and blame the other for the gridlock.

Looking at the markets, there were three key releases out of Thursday, but the news was mostly disappointing. New Home Sales came in at 377 thousand, falling below the forecast of 382K. CB Consumer Confidence, a key consumer indicator, dropped sharply to 65.1 points, its lowest level since August. The estimate stood at 70.3 points. Unemployment Claims did look sharp, falling to 350K, easily beating the estimate of 365K. Pending Home Sales will be released later on Friday, the second key housing indicator in as many days. If this release also falls below the forecast, it could be sign of weakness in the US housing sector, a key engine of economic growth. The mixed readings again raise concerns about the direction of the US economy and the durability of the economic recovery. With doubts continuing to linger about the health of the economy, the fiscal cliff is the last thing that the markets need, and negative market sentiment could take the wind out of the recovery as we enter 2013.

USD/CAD for Friday, Dec 28, 2012

USD/CAD
Dec 28 at 10:55 GMT

0.9950 H: 0.9959 L: 0.9940

USD/CAD Technical

USD/CAD continues to show little movement, but has broken through resistance at 0.9943. The pair is rangebound around 0.9950, and has not made any movements toward the parity line, which is the next line of resistance. On the downside, 0.9909 is the next line of support. This line has been under pressure throughout the week, but remains firm.
• 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 showed some movement, as the short position component increased. The bias still favors long positions however, as most traders expect the pair to continue move higher towards the important parity line. If the pair does break out and the loonie loses ground, we can expect the ratio to continue to change as more long positions are filled.
As the markets get increasingly nervous about fiscal cliff, the crisis could have a major impact on the movement of USD/CAD. With a breakthrough appearing less likely before the January 1 deadline, we could see a flight towards the safety of the US dollar, at the expense of the loonie.
USD/CAD Fundamentals

• 14:45 US Chicago PMI. Estimate: 51.2 points.
• 15:00 US Pending Home Sales. Estimate: -0.3%.
• 15:30 US Natural Gas Storage. Estimate: -73B.
*Key releases are highlighted in bold
*All release times are GMT

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