We all live in a Yellen submarine. Since the dovish central banker became the putative front-runner in the race to lead the Federal Reserve, fears about the debt ceiling debacle have been submerged under the expectation that cheap liquidity would continue to flow into the financial markets.
Today, this dynamic is receiving additional momentum from signs that a resolution to the crisis may be imminent. In a meeting last night, Republicans and Democrats moved toward a compromise that would allow the American government to continue borrowing into November – allowing the two parties to work out a grand bargain without triggering a disastrous outcome.
Equity indices are flirting with all-time highs and safe haven currencies are coming under pressure as traders purchase economically-sensitive assets around the world. The dollar and the euro are up against the yen, while West Texas tea is trading hands near the $101 mark. The commodity complex is generally receiving lift, with Doctor Copper reversing some of its recent losses, reflecting a broader sense of global economic optimism. The Canadian dollar is the outlier, remaining on the wrong end of the trading stick, weighed down by economic performance concerns.
For now, this sense of optimism seems well-justified. The financial system is caught in a ‘Goldilocks’ moment, with economic activity unlikely to accelerate enough to shut the taps at the Fed, while the political risk premia currently attached to the Treasury market will almost certainly disappear before the end of the month. The market porridge isn’t too hot, and it isn’t too cold – it’s just right.
However, this isn’t likely to last – the taper isn’t vapor. Barring an unforeseen disaster, tightening fears will return in the coming months. As Raghuram Rajan, India’s new central banker put it recently – “Let us remember that postponement of tapering is only that – a postponement… Let’s not lose the chance, the warning that we have been given, because this is going to come back and what we need to do is put our house in order before.”
For Canadian dollar sellers, today’s opportunities are likely to be fleeting – limit orders and future-dated positions should be placed at relatively conservative levels. US dollar sellers may see further gains in the weeks to come, meaning that legging trades in across a broader range should help to optimize execution levels. This weekend will quite likely bring a break of the current trading range and liquidity will begin to collapse after noon, implying that orders should be discussed this morning.
Happy trading – and have a great weekend!
Weekend Support Levels:
USDCAD: 1.0360, 1.0334
EURUSD: 1.3977, 1.3942
Weekend Resistance Levels:
USDCAD: 1.0462, 1.0488
EURUSD: 1.4104, 1.4139
By Karl Schamotta, Director, FX Strategy and Structured Products of Cambridge FX