Fed’s no taper decision sets framework for weaker US dollar – TradingFloor.com

Recap: Last week started off with a Japanese holiday and this week does as well (Autumnal Equinox Day). All we need now is for another US Federal Reserve chairman candidate to withdraw his/her nomination and it would be “Groundhog Day-the sequel”. On Wednesday, the much awaited Federal Open Market Committee decision caused quite a kerfuffle when chairman Ben Bernanke, apparently deviating from his earlier script, decided not to taper in September. Needless to say the market reaction was swift, sharp and in the case of USDCAD, shortlived. By Friday, economists and strategists were shredding their previous forecasts and outlook convinced that a Janet Yellen-led Fed meant easy money, lower interest rates and a weaker US dollar, maybe into 2014.

The week ahead: Angela Merkel has been returned as Germany’s chancellor for the third time but apparently one seat shy of a clear majority and with her former Free Democrat allies crashing and burning an element of uncertainty still remains. So far, the FX reaction has been limited. This last full week in September will see a bevy of Fed speakers (Lockhart, Dudley, Pianalto, George, and Evans) all putting their spin on last week’s FOMC decision although markets may be a tad sceptical as to the message. The US dollars reaction to the “non-taper” news neatly illustrates the adage that “markets hate uncertainty” a sentiment that will be put to the test again this week due to US political gamesmanship and the risk of a government shutdown. The Republicans are all for funding the government except for the Obamacare portion, which the Democrats insist has to happen. It is very likely that both parties are just posturing and giving the back benchers a chance for some TV time before an 11th-hour deal is reached.

The data: The HSBC September Manufacturing PMI for China kicked off the week coming in at 51.2 which gave AUDUSD a bit of a boost on the improving outlook for global risk. There is a decent amount of data from the US next week which could be overshadowed by the non-taper hangover and the risk of a US government shutdown.                                                                                                                                                                                                                      Monday: September Markit PMI index (forecast 54.0 from 53.1)-US dollar supportive                            
    Tuesday: S&P/Case Schiller July Home Price Index and the FHFA House Index-both to rise 0.8 percent, US September
                 Consumer Confidence (Forecast 79.5 vs. August 81.5) could offset any benefits from housing data        
     Wednesday: August Durable Goods Orders (forecast 1.2 percent vs. negative 0.6 percent in July)                                    Thursday: Initial Jobless Claims (325,000)  Q2 GDP (forecast 2.6 percent)                                                                         Friday: Reuters/Michigan September Consumer Sentiment (forecast 78.2 vs. 82.1 previously)

The key take away from this week’s data is that if most of the releases surprise to the upside, traders may put a little more faith in the Fed’s Bullard’s Friday comments about the possibility of an October start to tapering.

The only data of note from Canada is July Retail Sales (forecast 0.6 percent, month over month). This is a rebound from the poor June numbers and a modest Canadian dollar positive.

USDCAD technical picture
The USDCAD is bearish as it remains in a short term downtrend while trading below the 1.0310-50 zone but needs to see a break of US dollar support at 1.0260 to extend losses to 1.0180. Longer-term, the USDCAD is bullish while trading above the 1.0170-80 area on the daily chart, a view supported by the complete reversal of Wednesday’s losses on Thursday and Friday. Admittedly, the technicals are muddled. The US dollar bearish trend is a tad dodgy as the US dollar should not have retraced through and then above the previous support area (1.0240-80) For the week, USDCAD trading should be confined within the 100-day and 200-day moving averages. The 100-day moving average is at 1.0345 and the 200-day moving average is 1.0213.

Wrap: The consensus seems to be that the failure to embark on a tapering programme in September is bearish for the US dollar. The prospect of a US government shutdown is also a dollar negative event. In addition, various positioning indicators, including the Commitment of Traders report still has traders short Canadian dollars which would suggest limited upside. However, this is a month-end, quarter-end and Japanese year-end which may result in US dollar demand for portfolio rebalancing or repatriation. I think USDCAD losses at the beginning of the week may be recovered by Friday.