USDCAD: Fiscal Cliff Concerns Derail Loonie’s Advances

Budget concerns in the world’s largest economy are projected to derail the recent advances of the Canadian dollar, and lead to losses against the safety bet US dollar. Risk aversion returns in the global market sentiment just a day removed from the holidays, as fresh debacles in the US Congress has already rattled the risk appetite of the markets. The spotlight is back on the United States and developments on negotiations over its looming fiscal cliff, or the lack thereof.

With US lawmakers struggling to find a consensus as to how to tackle the US fiscal cliff, Asian shares ended a seven-day winning streak earlier today. European equities likewise dropped, as elated investor sentiment over Tuesday’s optimism on a Greek debt deal was replaced with renewed fears over the US fiscal cliff.

US Senate Majority Leader Harry Reid said Democrats and Republicans have made “little progress” in negotiations on how to cut the US budget deficit by year-end. “We only have a couple weeks to get something done, so we have to get away from the happy talk” and do “specific things.”

Analysts price in the viability that market focus would remain on discussions over a collection of $607 Billion in automatic tax increases and spending cuts scheduled to take effect at the beginning of 2013 to prevent a short-term shock to the economy and reach an agreement on long-term deficit reduction. Some think that it is likely that Congress will find some weak compromise and push off some of the work into next year.

“It’s all focused on external issues, the US fiscal cliff and whether the euro zone is going to defer its issues with Spain and Greece,” Greg Moore, a currency strategist at Toronto-Dominion Bank, said in a telephone interview. “There was a glimmer of hope that the two sides might come together, but we all know politicians and that there won’t be a solution until the 11th hour,” says Steve Butler, Managing Director in Toronto at Bank of Nova Scotia’s Scotiabank unit. “The Canadian dollar would be one of the first currencies to get hit by selling if we do fall off the cliff.” It is therefore no surprise that risk aversion is taking over the demand for the Greenback-Loonie pair.

Considering the sour sentiment over under-developments on the fiscal cliff negotiations, the USDCAD is deemed for a buy bias today. Be cautious still of probable technical price corrections.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.