Canadian Dollar

Just when the dollar's last rites were being considered, it has bounced back and looks poised to move higher in the days ahead.

Overview of the price action in the fx market.

It may seem counter-intuitive but the US dollar appreciated last week, despite the partial closure of the Federal government, the heightened risk of default and the nomination of Yellen.  The dollar can move higher next week too.  

The dollar is the world’s go-to currency. But for how much longer? Will the dollar’s status as the only true global currency be irreparably damaged by the battle in the US Congress over raising the federal government’s debt ceiling? Is the dollar’s “exorbitant privilege” as the world’s main reserve currency truly at risk? Sane governments do not default when they have a choice – especially not when they enjoy the “exorbitant privilege” of issuing the only true global currency. We are about to find out whether the US still has a sane government.

Technically, the dollar is looking a bit better.  Here is our assessment.

No, we are not talking the stock market reaction, which is driven purely by trillions in excess global, fungible liquidity sloshing around and as a result stocks are up on government shutdown day in a complete mockery of, well, everything. Instead, this is what Wall Street sellside strategists believe will be the impact of the shutdown (and how it ties in with the far more important debt ceiling negotiation). It should not be at all surprising that to virtually everyone, the shutdown (or any other negative development) is a "buying opportunity" which makes sense: after all the person who is truly in charge of the "wealth effect" will be up and running uninterrupted and there is no risk today's $2.75 - $3.50 billion POMO will be even modestly delayed.

Overview of near-term dollar outlook.

Even if one correctly predicts what the FOMC does next week, getting the direction right for dollar is a different matter.  The markets are anticipatory in nature and the effect often takes place before the cause.  

Price action in the foreign exchange market in the context of fundamental developments.  Disappointing US jobs data clouds the near-term outlook for the greenback,  

The Fed is among the only major central banks not meeting next week, yet it is overshadowing the others.  The dollar's tone improved markedly in recent days.  There is still scope for the Fed to disappoint the dollar bulls.  

The Fed's GDP forecasts are still too optimisitc even after the Q2 GDP revisions.  And the core PCE deflator is closer to zero than it is to the Fed's target.  Tapering still a done deal ? 

Quick, dispassionate overview of the fx market.

• Lew warns Congress to strike debt ceiling deal (FT)
• Central-Bank Moves Blur the View (WSJ)
• Brazil, Indonesia launch measures to shore up their currencies (FT)
• More mainstream media reminded about Fukushima - Radioactive ground water under Fukushima nears sea (AP)
• Fukushima inspectors 'careless', Japan agency says, as nuclear crisis grows (Reuters)
• New York Banker Arrested on Rape Charges in East Hampton (NYT)
• This time they mean business, for real: CFTC Moves to Rein In High-Speed Traders (WSJ)
• Britain operates secret monitoring station in Middle East (Reuters)
• Moody’s considers downgrading top US banks (FT)
• China's Bo calls wife mad after she testifies against him (Reuters)
• JPMorgan Sub-New Normal Growth Seen Vexing Next Fed Chief (BBG)
• SEC calls for cooling-off period for more staff (Reuters)

Anticipation of Fed tapering is being cited for both dollar gains and dollar losses.  What gives?

Short-term, dollar risks still appear on the downside, but this appears largely corrective in nature.  Medium-term, a higher dollar still appears to be the most likely scenario.