Loonie Improves On Weak NFP

The Canadian dollar has gained ground on Tuesday, as USD/CAD trades slightly below the 1.03 line in the North American session. US Nonfarm Payrolls was a major disappointment, as the key employment indicator was well short of the estimate. The US unemployment rate dropped to 7.2%, a five-year low. The loonie also got some help from Canadian Core Retail Sales, which beat the estimate.

There was plenty of anticipation leading up to the release of US Nonfarm Payrolls on Tuesday, but the markets were left with a sour taste following the weak release. The indicator dropped to 148 thousand in September, compared to 169 thousand the month before. This was a six-month low, and was nowhere near the estimate of 182 thousand. Although the unemployment rate dipped to 7.2%, a five-year low, the participation rate remained at 63.8%, its lowest level since 1978. These figures point to US employment market which continues to struggle to create new jobs.

Canadian Core Retail Sales, the most important consumer spending indicator, posted a gain of 0.4% in September, compared to 1.0% the month before. Retail Sales was unable to keep pace, posting a weak gain of 0.2%, short of the estimate of 0.3%. This indicator also lost ground, as the August release was a respectable 0.6% gain. These retail sales numbers point to weaker consumer spending, which is not good news for the fragile Canadian economy.

After a bitter political struggle which saw the US on the brink of a sovereign default, the Republicans and Democrats finally reached an agreement last week to reopen the government and raise the debt ceiling. However, the deal provides short-term relief only - the government will be funded until January 15, while the debt limit will be raised until February 7. So, we could be right back where we started in just a few months. The dollar initially gained ground after the agreement was announced, but was broadly lower as optimism faded.

The markets had expected the Federal Reserve to taper QE back in September, but the prolonged shutdown and debt crisis will likely mean that the Fed will shy away from any QE moves until early next year. On Monday, Chicago Fed Reserve President Charles Evans reiterated his support for continued monetary stimulus, saying that the Fed would likely need a few more months of US employment data before reducing QE. Currently, the Fed is purchasing $85 billion worth of bonds each month, and any scaling back will have a strong impact on the US dollar. Evans said that he doesn't expect the Fed to make a move at the December policy meeting, given that the deal reached in Congress to reopen the government and raise the debt ceiling does so only for a few months.
USD/CAD for Tuesday, October 22, 2013
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• USD/CAD October 22 at 14:10 GMT

• USD/CAD 1.0283 H: 1.0310 L: 1.0309

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• USD/CAD has dropped in Tuesday trading, falling below the 1.03 line.

• The pair continues to face resistance at 1.0337. This is followed by a stronger resistance line at 1.0442.

• USD/CAD is testing support at 1.0282. With the Canadian dollar continuing to improve, we could see this line fall during the North American session. This is followed by a support level at 1.0224, which has remained intact since mid-September.

• Current range: 1.0282 to 1.0337

Further Levels

• Below: 1.0282, 1.0224, 1.0158 and 1.0068

• Above 1.0337, 1.0442, 1.0502, 1.0573 and 1.0652

USD/CAD ratio is pointing to movement towards short positions in Tuesday trading. This is reflected in what we are seeing from the pair, as the Canadian dollar has posted gains. The ratio continues to be made up of a majority of long positions, indicative of a trader bias towards the US dollar reversing course and moving to higher ground.

The Canadian dollar has posted gains on Tuesday, courtesy of Core Retail Sales which beat the estimate, as well as a weak US Nonfarm Payrolls. We could USD/CAD sustain further losses during the day, but these are likely to be limited.

USD/CAD Fundamentals

• 12:30 US Nonfarm Employment Change. Estimate 182K. Actual 148K.

• 12:30 US Unemployment Rate. Estimate 7.3%. Actual 7.2%.

• 12:30 US Average Hourly Earnings. Estimate 0.2%. Actual 0.1%.

• 13:00 US TIC Long-Term Purchases. Estimate 30.9B. Actual -8.9B.

• 14:00 US Construction Spending. Estimate 0.5%. Actual 0.6%.

• 14:00 US Richmond Manufacturing Index. Estimate 0 points. Actual 1 point.

• 14:30 US Natural Gas Storage. Estimate 81B. Actual 77B.