USD/CAD: No Rate Change, Loonie Loses Ground

 | Oct 23, 2013 12:15PM ET

The Canadian dollar has lost about one cent on Wednesday, as USD/CAD has pushed higher and is trading close to the 1.04 line in Wednesday's North American session. As expected, the Bank of Canada maintained it key interest rate at 1.00%. It's a quiet day in the US, with no major releases on today's schedule.

There were no surprises from the BOC, which continued to maintain the benchmark rate at 1.00%. However, the BOC's rate statement stated that the country's level of economic activity is "lower than the Bank had been expecting", and there was no reference to the need for future rate hikes, which we've seen in previous rate statements. The BOC's growth forecast reflects a slowdown in the Canadian economy, with the forecast for 2013 downgraded from 1.8% to 1.6%, and the outlook for 2014 lowered from 2.7% to 2.3%.

There was plenty of anticipation leading up to the release of US Non-Farm Payrolls on Tuesday, as the key indicator had been postponed from early October due to the government shutdown. However, the markets were left with a sour taste, as NFP slipped to 148 thousand in September, dropping sharply from 169 thousand in August. This was a six-month low, and well off the estimate of 182 thousand. The US unemployment rate dipped to 7.2%, a five-year low, but this does not point to increased employment, as the participation rate remained at 63.8%, its lowest level since 1978. These figures indicate that the US labor market continues to have difficulty creating new jobs. The US dollar was broadly lower following the weak NFP reading, and the euro gained about one cent against the dollar.

There was some optimism and relief last week, as the Republicans and Democrats finally reached an agreement last week to reopen the government and raise the debt ceiling, following weeks of fighting in Congress. However, the deal provides short-term relief only - the government will be funded until January 15, while the debt limit will be raised until February 7. Both sides have agreed to discuss budget issues and try to reach a long-term agreement before December 13. So we could be right back where we started in just a few months. At the same time, the public is angry at lawmakers for creating the crisis, and with congressional elections only a year away, the politicians on Capitol Hill may think twice before plunging the country into another fiscal and political crisis.

The US government is again functioning and a default has been averted, but the agreement hammered out in Congress last week provides short-term relief only, as it raises the debt ceiling until early February and funds the government until mid-January. The underlying budgetary issues remain unresolved, consumer confidence has been shaken and employment numbers are not looking all that good. Given this situation, the Fed is unlikely to push the taper trigger until early 2014, perhaps not before March or April.

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