Market Overview

USD/CAD – Loonie Levels Off After Strong Gains

The Canadian dollar has leveled off in Thursday trading after Wednesday's (January 2) strong gains, which saw the Canadian currency take advantage of broad US dollar weakness following the agreement on the fiscal cliff issue. In economic news, US employment numbers were mixed. Unemployment Claims were well above the estimate, but ADP Employment Change looked very sharp, posting its highest gains since March. Today's other highlight is the minutes from the FOMC's most recent policy meeting. In Canada, releases will resume on Friday after a long break, with the markets eagerly awaiting the Unemployment Rate and Employment Change.

With the US about to topple over the fiscal cliff, Congress pulled out all the stops and managed to cobble together a last minute agreement to avert the crisis. Without a deal, there was a danger that the US economy would slip into recession into 2013, due to a combination of tax increases and spending cuts. The agreement permanently extends tax cuts for all earners up to $450,000 and retains other tax breaks for individuals and businesses. Although both the Senate and House of Representatives passed the deal by large margins, although there was plenty of grumbling on both sides of the political divide- perhaps proof that the deal reached was a true compromise.

Most notably, the agreement fails to deal with two critical issues – the debt ceiling and spending cuts. The debt ceiling will be reached in February, and action will have to be taken to avoid a default on the country's debt. Republicans, who were unhappy that the fiscal cliff agreement did not address spending cuts, are expected to demand cuts in programs such as Medicare and Social Security. They will face stiff resistance from the Democrats, who vehemently oppose any reductions in these programs, and favor raising the debt ceiling, which is what Congress agreed to in 2011.

President Obama has stated he will not negotiate over the debt ceiling, but some kind of agreement will likely be reached between the two sides. The IMF has also weighed in on the matter, saying that the fiscal agreement is not enough, and that the US must take further action to deal with its long-term debt problem. The IMF call for Congress to quickly approve a comprehensive plan which to “ensure both higher revenues and containment of entitlement spending over the medium term”.

As we begin 2013, a look at recent key US releases points to a mixed and confusing picture. Employment numbers improved in December, and the markets will be hoping for a repeat from Thursday's economic releases. However, consumer confidence fell badly last month, indicating that consumers still lack confidence in the economic recovery and are wary to open up their wallets. US Housing figures were mixed as well, with New Home Sales down but Pending Home Sales up sharply. Although there are signs that the US economy is improving, this zigzagging makes it difficult to predict what to expect in early 2013.

In Canada, fundamentals remain strong, but the manufacturing and housing sectors have had a bumpy ride, and this could slow growth in 2013. There is hope that 2013 will see an improvement in the global economy , which would translate into increased demand for Canadian oil and other raw materials, and help to boost both the Canadian economy and the Canadian dollar.

USD/CAD for Thursday, Jan 3, 2013

USD/CAD
Jan 3 at 14:50
GMT

0.9854 H: 0.9856 L: 0.9850

USD/CAD Technical

S3 S2 S1 R1 R2 R3
0.9767 0.9812 0.9845 0.9909 0.9943 1.00

USD/CAD has leveled off from its recent drop, and is steady in Thursday's trading. The proximate support and resistance levels (S1 and R1 above) remain in place. The pair is testing support at 0.9845, with the next support line at 0.9812. On the upside, 0.9909 continues to provide the pair with strong resistance.
• Current range: 0.9845 to 0.9909.
Further levels in both directions:
• Below: 0.9845, 0.9812, 0.9767, 0.9625, 0.9526 and 0.9445.
• Above: 0.9909, 0.9943, 1.00, 1.0041, 1.0157 and 1.0252.

OANDA's Open Position Ratios
The broad weakening by the US dollar following the fiscal cliff agreement has resulted in an increase in long positions. The ratio remains strongly biased in favor of long positions. This indicates that trader sentiment strongly favors the US dollar to rebound and make inroads against the loonie.
USD/CAD has leveled off, but we have not seen a strong rebound by the US dollar, as is the case with other majors such as the euro and pound. Once the markets digest the fiscal cliff news and move on to other matters, we could see the US dollar improve. Also, with a return to fundamental releases, look for this week's employment numbers out of the US and Canada to have an effect on the movement of USD/CAD.

USD/CAD Fundamentals
• 12:30 US Challenger Job Cuts.
• 13:15 US ADP Non-Farm Employment Change. Estimate 134K. Actual 215K.
• 13:30 US Unemployment Claims. Estimate 356K. Actual 372K.
• 19:00 US FOMC Meeting Minutes.
• All Day: US Total Vehicle Sales. Estimate 15.3M.

*Key releases are highlighted in bold
*All release times are GMT

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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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