Forex: USD/CAD slips below 1.06 despite US budget deal

on Dec 11, 2013
Updated: Oct 21, 2019

**, Wednesday 11 December:**

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Congressional budget negotiators last night reached a two-year deal that, if approved by the House and Senate, will ease the pain of spending cuts but more importantly will break a fiscal gridlock in Washington DC which has arisen every year since 2010.
The chief architects of the accord, Democrat Senator Patty Murray and Republican Representative Paul Ryan, propose increased federal spending in the near term, relaxing the ‘sequester’ budget cuts. “I think this agreement is a clear improvement on the status quo,” said Ryan, a former Republican vice-presidential nominee.

While the bi-partite deal is not a major concern in terms of the US deficit, if approved it should restore Congress’ normal budgeting process without the political brinkmanship that has repeatedly compromised US economic stability in recent years. Observed Ryan, “it makes sure we don’t lurch from crisis to crisis.”
President Barack Obama issued a statement lauding the accord, calling it a “good first step”, and urging Congress to approve the package “so I can sign it into law and our economy can continue growing and creating jobs without more Washington headwinds”.

Ray Attrill, global co-head of currency strategy at National Australia Bank, offers this take: “This looks like a deal that, at the margin, adds to the probability that the Fed will feel confident in starting the QE tapering process next week, assuming that the House is going to get this passed this week and the Senate next week.” Attrill adds that the accord is generally positive for the US dollar.

Although the greenback did firm a tad against the loonie on the news, the USD/CAD has so far failed to arrest its five-day decline because the Canadian dollar has been bolstered by firming commodity prices. The CAD is seen as a commodity currency because of the country’s large energy sector, which ranks amongst the top 10 producers in the world. The bulk of imported oil consumed in the US comes from north of the border and not the Middle East.

“It’s a combination of crude and other commodities — copper, as well — that’s probably giving a bit of a boost to the loonie,” says David Doyle, a strategist at Macquarie Capital Markets.
He observes that a lot of traders had piled into shorting the CAD but believes “that trade has run its course, for now”. The loonie is currently revisiting some of its recent losses and the Macquarie analyst notes that “that’s been the pattern over the past year — recovery, and then resuming the broader downtrend, which we expect to continue over the next 12 months”.
In today’s European trading, the USD/CAD has slipped below the psychological level of 1.06 for the first time in December, reaching a 13-day low of 1.0591.
Right now, the pair is slightly up at 1.0593, though down 0.07 percent intraday.
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