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· BoJ stands pat on monetary policy; no additional stimulus has JPY outperforming other developed market currencies and is gaining ground on the USD

· Delay in the release of jobs data due to government shut-down has markets stymied; waiting on cues from leaders in Washington as equity futures edge slightly higher

· Ivey PMI for Canada on tap, due at 10:00am EST and expected to come in at 52.9. See how to trade the Ivey PMI with USD/CAD

While the price declines have been modest when looked at on a relative basis, it appears as if some anxiety is beginning to creep into the markets, as the partisan posturing from both sides of the aisle has done little to free Washington from its political gridlock. The lack of constructive arbitration between the two sides now has the S&P 3.7% from its highs after the Fed announced the ‘taper’ would be delayed, with the VIX rebounding to 3-month highs as the Treasury and White House urge Congress to find a solution or risk financial market catastrophe. With the S&P closing below its 50-day moving average yesterday, the price action for equities will be key over the next few sessions as the violation of the 50-day moving average has proven to be a good entry point for investors looking to get long and buy the dip. The Loonie continues to waffle in no-man’s land, with traders unsure of how to position themselves as the government shut-down and debt ceiling debate drag on. On the one hand, the potential of a default on US debt would be a calamitous development for global growth prospects, and would see traders look to shed exposure to growth-correlated assets like the Loonie; however, the Bernanke put is still very much in play, and wouldn’t be too hard to foresee the Fed holding off on their reduction of asset purchases if the fiscal situation harms the economy in a significant way. Price action for USDCAD could well be characterized as the calm before the storm, with the potential for a swift and violent break in either direction as the drama in Washington reaches a climax. As it has been for the last few sessions, the Loonie is pivoting above the 1.0300 level as we head into the North American open, failing to break from its narrow overnight range.

The Asian session saw equities head into the end of the week on soft ground, tracking the negative close in the US and further JPY strength. The Bank of Japan refrained from adding any further monetary stimulus at its policy meeting last night, content with the pace of recovery and the economy’s future prospects given the recent swell in business confidence. The Bank of Japan also kept its economic assessment unchanged from the last policy announcement, stating that the economy would continue to recovery modestly and that inflation will rise gradually. During the subsequent press conference, Governor Kuroda did say that the central bank would take additional policy steps if external tail risks threatened the recovery, but at this point the current easing schedule was sufficient in achieving it’s the bank’s policy target. While it is likely the BoJ will need to take additional steps to achieve their inflation target, the promising green-shoots will most likely keep additional monetary easing at bay until late Q1 2014. We expect the JPY has further room to strengthen in the short-term should the political impasse in Washington fail to be resolved in an expedited manner; however, the subsequent outperformance of the yen is at risk over the medium-term as the Fed begins to unwind their asset purchase program while the BoJ continues to pump additional liquidity into the system in order to achieve their inflation goal of 2%. The yen is rising against the USD on the inaction on the BoJ overnight, with USDJPY honing in on the 97 handle at the time of writing.

Over in Europe, after an initial move lower the followed weakness in Asia, equities are establishing themselves in the green early in the their session. Producer prices in the Eurozone came in slightly weaker than expected during the month of August, signaling companies are still reluctant to raise prices in fear of choking off retail demand. Although equities are moving higher into the end of the week, EU macro data has fallen to 7 week lows and now underperforming when compared to US macro. The EUR has sunk back below the 1.36 level against the USD, while the GBP also falls from recent highs, slipping towards the 1.60 mark against the buck. The DXY is seeing a nice rebound throughout the European session, with buying interest pushing the USD basket closer to the 80 handle.

North American equity futures are looking to recover some of the losses experienced yesterday, and are slightly higher before the opening bell. Gold is finding some slight selling pressure on the positive equity performance, with the yellow metal slipping 0.11% to change hands at $1,315/ounce. Front month WTI is managing to claw itself higher after yesterday’s flush, adding to 0.42% to trade up to $103.75/barrel.

The Ivey PMI reading for the Canadian economy is the only tier-one data for North America set to be released today; a rather dull Friday for economic releases now that the Non-Farm payrolls will be delayed until the government re-opens. The reading on purchasing manager activity in Canada has the ability to moderately influence the Loonie should we see a material deviation from the median estimate, although it will most likely only be a knee-jerk reaction, as the commodity-currency should see broader flows come from any new developments in Washington. The median analyst estimate according to Reuters polling is that the reading edges higher to 52.9, an increase from the 51.0 that was registered in August. The interesting sub-category to watch will be the employment index, as this fell off a cliff in August and dropped from 50.4 to 43.6, so it will be interesting to see how purchasing managers view the employment landscape in Canada.

Further reading:  Sterling coming off at last?