Forex: USD/CAD - Weekly Outlook

The week kicks off with the fiasco in Washington DC, where Congress can orchestrate a partial federal government shutdown by failing to pass a temporary funding measure before the current expenditure mandate expires at the end of the day.

The crisis arrives on cue for the third straight year as opposing factions in the Republican-controlled House of Representatives fail to agree on a budget for the new fiscal year beginning tomorrow, 1 October.

In financial markets there remains extant a belief in yet another last-minute deal, which seems to be the new Washington normal. Absent such resolution, all non-essential government operations will be forced to shut down, an outcome that could sent a shockwave through the global exchanges.

Canada’s GDP for July is scheduled for release at 13.30 BST today, with analysts’ expectations for monthly growth of 0.6 percent, following June’s drop of 0.5 percent. Year-on-year economic activity is widely anticipated to expand by 1.2 percent, after the prior increase of 0.9 percent.

Despite the optimistic market consensus, traders should be vigilant about Canadian consumption, which accounts for nearly 60 percent of the nation’s GDP. While consumer spending progressed by 0.9 percent in the second quarter, it was fuelled by a 4.7 percent surge in automobile purchases.

The buying of new cars accounts for over one-third of household spending and the volatile sector may disappoint in the near future, notwithstanding growth in four consecutive quarters.

Also due out at 13.30 BST are Canadian Raw Materials Price Index (RMPI) and Industrial Product Price Index (IPPI) for August. Month-on-month, the RMPI inflation is forecasted to ease from July’s rise of 4.2 percent to just 0.3 percent, while the IPPI is expected to increase by 0.2 percent, following the prior upswing of 0.3 percent.

In Toronto tomorrow at 16.55 BST, Bank of Canada senior deputy governor Tiff Macklem is scheduled to speak on ‘’Global Growth and the Prospects for Canada’s Exports”.

Macklem may offer some insights into future monetary policy and the market will be especially attentive for any remarks on the value of the loonie. Responding to a question on point earlier this month, BoC governor Stephan Poloz noted that “the market always gets the dollar right”, suggesting he has no inclination to take on the markets over the value of the currency, at least for the time being.

Also tomorrow, the ISM US Manufacturing PMI for September is due out at 15.00 BST, with forecasts for a slight contraction from August’s 55.7 to 55.3.
The current-month ADP US Employment Change will be reported Wednesday at 13.15 BST.

Private sector job growth is expected to have increased marginally, by 1,000 up on August’s 176,000. Traders will then turn their attention to the respective words of Federal Reserve chairman Ben Bernanke and St Louis Fed president James Bullard at 18.30 BST.

The US policymakers may shed some new light on the Federal Open Market Committee’s plans for quantitative easing and the recently-raised notion of adding an inflation ‘’floor’’ to the central bank’s forward guidance.

According to Fredrik Paulson, FX analyst at Scandinavian investment bank Nordea Markets, ‘’the close correlation between the US/Canadian 10y government spread and USDCAD … suggest that tapering (in turn driving yields) has been rather significant in guiding USDCAD since the tapering-debate started in May”
Despite the recent depreciation of the currency pair, the USD/CAD continues to trade above the support projected from September 2012, ‘’confirming the intactness of the upward trend’’, Paulson adds.

The research team from Nordea believes that the US dollar ‘’should have the potential to strengthen more markedly’’ against its Canadian peer as the Fed finally starts reducing the pace of asset purchases. On the strength of this evaluation, the Scandinavian bank maintains its three-month forecast at 1.05 loonie to the greenback.

Thursday will see release of the latest US initial jobless claims, along with data on factory orders. Initial claimants for unemployment relief are expected to rise by 10,000 to 315,000, while economists are predicting that factory orders will have gained 0.2 percent in August, following July’s slump of 2.4 percent. Also on Thursday, ISM will release its US Non-Manufacturing Composite for September at 15.00 BST.

Friday’s fundamental highlight will undoubtedly be US Non-Farm Employment Change for September, due out at 13.30 BST. Current projections are for 179,000 versus August’s 169,000. US dollar bulls will hope for stronger-than-expected job creation following two consecutive disappointing readings accompanied with downward revisions of the prior period numbers.

Analysts aren’t expecting any meaningful change to the US unemployment rate, seen as likely to remain at 7.3 percent. As against that, the labour market indicators from the Conference Board’s consumer confidence survey suggest further decline in the jobless rate. The chart below compares the US unemployment rate with the net percent of respondents of the survey who believe “jobs [are] hard to get’’ minus those responding ‘’jobs [are] plentiful’’.