Canada Markets

The decision by the United States Federal Reserve to maintain its monthly $85 billion/month bond-buying program came as a surprise to many followers of this situation, with the market poised for a $10 billion reduction or "taper" to take place this month.

This did not happen, however, which immediately led to a sharp increase in many equity and commodity markets, with the Canadian dollar moving sharply higher at the same time. This was not to last; as they say all good things come to an end, with suggestions now made that the taper may now begin in October which has once again tempered the enthusiasm across markets.

The Canadian dollar rocketed 76 basis points higher Wednesday, breaking the resistance of its downward-sloping trendline which has been in place since Jan. 11 of this year, while also pushing above its 200-day moving average. This week's high of $.9799 failed to test the June high of $.9823, however, while prices have since retraced back below trendline resistance which is at $.9725 CAD/USD. Today's trade re-tested this resistance although was met with resistance and retraced significantly. At last look, the loonie was 45 basis points lower, near session lows.

Nearby support for the Canadian dollar may be found at $.9661, the 38.2% retracement of its recent rally, as well as at $.9642, its 100-day moving average. The $.9615 to $.9618 level may also provide support, which represents the 50-day moving average and the 50% retracement of the Aug. 23 to Sept. 19 rally.

Given time, the Canadian dollar may prove to consolidate in a symmetrical triangle pattern, bound by the resistance of the downward-sloping trendline along with support at the upward-sloping trendline which began on July 5, both shown by the converging blue lines on the attached chart. This would likely act as a continuation pattern or pause in the existing down-trend.

The lower chart study indicates the momentum indicators based on the daily chart. The faster moving %k line has crossed the slower %D line while in oversold territory on the chart which indicates a move to downward momentum.

Further weakness in the Canadian dollar came with Friday's Statistics Canada release of August inflation data, with the reported annual rate falling to 1.1% after July's 1.3% rate, meeting the expectations of economists. Reduced inflation lowers the chance of interest rate hikes and as a result the dollar is less desirable and is sold by investors.

The decision to taper or not to taper stimulus spending in the U.S. could perhaps be viewed as a double-edged sword for Canadians. The $85 billion in monthly expenditures is received well by the markets. It encourages trade in risk assets and acts to support both equity and commodity price levels. DTN's on-going analysis of non-commercial positions as reported by the Commodity Futures Trading Commission is directly linked to the buoyancy in the market which is currently supported by the stimulus spending.

At the same time, the ultimate decision is suggested to be a "data-driven" decision, meaning economic data in the U.S. must be viewed as favorable before this tapering will begin. Perhaps an argument could be made that a move to taper would indicate a recovery in the U.S. economy which would also be a boon to Canadians given the depth of our trading relationship. Time will tell.

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Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

(ES)

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