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US and Canadian Dollars Sink as Wall Street Dives
The US Dollar underperformed against its major counterparts, after it was unable to capitalize on haven demand as the S&P 500 tumbled 0.84 percent to close at its lowest since September 5th. The source of pessimism in markets likely stemmed from the latest US Consumer Confidence Report, which dipped to 125.1 in September from 135.1 in August against expectations of a much smaller deterioration to 133.0.
That was the sharpest decline in nine months, which caught investors off guard. The US economy has continued to outperform its major peers this year, supported by a solid labor market with robust consumer spending. While the trade war with China has dented local manufacturing output, it has had a more profound adverse impact on countries in Europe and in the Asia Pacific region.
Signs of weakness in the US consumption sector – the largest segment of GDP – can have a profound impact on the economy and further dampen global growth prospects. Unsurprisingly, this led to an uptick in Fed rate cut bets as local front-end government bond yields declined. That worked against the US Dollar’s favor, but that can easily turnaround if a further sap in economic confidence stokes aggressive risk aversion.
The Canadian Dollar was also weakened over the past 24 hours by two fundamental risks. First, sentiment-linked crude oil prices suffered despite recent gains from Middle East supply disruption concerns. The commodity is a key revenue for Canada and can thus impact BoC monetary policy expectations. The second is the risk of a downside spillover from the US, which is Canada’s top trading partner.
Wednesday’s Asia Pacific Trading Session
Ahead, Asia Pacific equities may follow Wall Street lower should risk aversion continue prevailing in the hours ahead. Financial markets are also keeping a close eye for US-China trade war updates heading into key meetings between the two economic powerhouses in the middle of October. Over the past 24 hours, US President Donald Trump said that he will not accept a bad deal with China.
A deterioration in market mood may bode well for the anti-risk Japanese Yen while hurting the sentiment-linked Australian and New Zealand Dollars. Follow-through for the NZD/USD may have to wait until the Reserve Bank of New Zealand interest rate decision passes. Markets are expecting the central bank to hold rates unchanged at 1.00 percent, but will be looking to see if further cuts could be warranted.
Canadian Dollar Technical Analysis
Despite its lackluster performance, the Canadian Dollar still rose against the US Dollar over the past 24 hours. This brought USD/CAD closer towards near-term support at 1.3226 after resistance held as a range between 1.3288 and 1.3310. A close under support opens the door for a test of what could be a potential rising support line from July.
USD/CAD Daily Chart
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— Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter