US Government Shut Down Turns Greenback Weak

So far in January, the USDCAD pair remains range bound between 1.2400 and 1.2580. The weak inflation, lower than anticipated JOLTS job openings, and a decline in the new housing starts in December is keeping the greenback weak. Despite a rally in the crude oil, the Canadian dollar was unable to gain ground against the US dollar due to the uncertainty created by the sixth round of NAFTA negotiations scheduled to begin tomorrow. Still, the recent economic data from both the countries indicate that the USDCAD pair will decline in the near-term future.

The US government officially shut down on Friday after the Senate rejected a short-term spending bill. There are no signs of progress towards ending the impasse. The Senate Democrats have demanded that Trump should deal with the fate of 700,000 people brought to the country illegally as children. Both Republicans and Democrats continue to blame each other. The greenback is expected to remain weak until the issue is sorted out and the bill is passed. The Republicans have only 51 seats in the Senate and 60 votes are required to pass the bill.

On the economic front, the preliminary consumer sentiment index reading fell to a six month low of 94.4, versus economists’ expectations of 97. According to the survey conducted by the University of Michigan, the consumer index reading was 95.9 in December.

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In Canada, the manufacturing sales increased 3.4% m-o-m in November. Analysts had expected a growth of 1.9%. In the previous month, the manufacturing sales declined 0.6%. Overall, 12 of 21 industries, representing 81% of the manufacturing sector, posted increases in November.

Earlier last week, the Bank of Canada raised the benchmark interest rates by 25 basis points to 1.25%. It is the third rate hike in a year. Therefore, the above facts indicate a possible decline in the USDCAD pair in the days ahead.

Technically, the USDCAD pair is facing heavy resistance at 1.2600 levels. The currency pair is also moving along the declining trend line as shown in the image below. Further, the negative reading of the MACD histogram confirms bearishness in the currency pair. Thus, we are expecting a fresh downtrend to begin soon.

We may go short in the USDCAD pair near 1.2500 levels, with a stop loss order above 1.2680. We will also place an order to book profit near 1.2280.

Additionally, we may also invest in a put option, which is valid for a period of one week. The option may be bought when the USDCAD pair trades near 1.2500 in the spot Forex market.

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