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When looking at yesterday’s closing level in US equities, the unchanged print in the S&P fails to adequately explain the see-saw battle between the bears and bulls that took place  on Wednesday.   Equities were initially supported during morning trade on rumors of progression in the Washington deadlock and the nomination of Janet Yellen as the next head of the Federal Reserve; however, the early pump was unable to sustain its strength heading into the afternoon, with stocks skidding into the close as risk appetite evaporated and investors focused on the uneasiness transpiring in the marketplace.

Fidelity Investments announced  on Wednesday  that it no longer holds any US government debt maturing around the debt-ceiling Armageddon date, as the largest manager of money market funds had been selling off all US paper coming due late October to early November over the last few weeks.   The short-term anxiety of markets can more clearly be seen when analyzing the term structure of the VIX, as the futures curve has inverted itself, illustrating investors are bidding up near-term protection to a level where it’s more expensive then equivalent protection expiring further in the future (the price of the October contract is higher than the November and December contracts.)

The Loonie was under pressure against the USD for the majority of the session, hit with a double-whammy of risk aversion selling and minutes from the FOMC meeting in September that were interpreted to be a little more on the hawkish side.   A quick scan of the minutes showed that most Fed officials saw a tapering of QE in 2013, with the program being wound-up by mid-2014, which caused the USD to spike briefly; however, looking deeper into the Fed dialogue it actually appears that the decision to not taper wasn’t all that close.   All but one member thought it would be appropriate to await further supporting evidence that the recovery had taken hold before adjusting the pace of asset purchases, and it seems as if the only reason it was a “close” call is because some members expressed uneasiness that not tapering would raise concerns about the Fed’s communication policy, as markets had more or less priced in a small taper for the September meeting.   From the standpoint of judging the incoming economic data, along with the tightening of financial market conditions in September, it was pretty lopsided in regards to the Fed remaining data dependent and needing to see stronger labour market conditions before altering the pace of asset purchases.   As such, we continue to believe the pace of asset purchases will not be altered until Q1 2014, with a slight risk to our forecast the first taper comes in December should we see unexpectedly strong gains in the labour market over the coming months.

The overnight session saw solid equity performance in Japan, with the Nikkei posting an increase of 1.12% driven by yen weakness as USDJPY moved into the highs 97s.   The Aussie is little changed before the opening bell in North America, despite a surprise drop in the unemployment rate as the economy created 9k new jobs.   The employment creation for the month of September was a little softer than economists had been expecting, however it was still positive enough to drop the unemployment rate from 5.8% to 5.6%.   Although the participation rate did dip slightly to 64.9%, the balance of the report is positive, corroborating evidence that the accommodative stance on monetary policy is increasing confidence in the region, and helping businesses fell comfortable about ramping up their workforces.   The Aussie was relatively unaffected by the news, with AUDUSD pinned in the mid-94s against the USD.

Across the Atlantic, improved investor sentiment on reports that Washington might be getting closer to kicking the can down the road has propelled stocks this morning, with the Stoxx, FTSE, ad Dax all up by over 1% at the time of writing.   In a relatively uneventful central bank meeting, the Bank of England decided to leave their overnight cash rate on hold at 0.5%, while maintaining the stock of asset purchases at £375bn.   There was no accompanying rate statement from the BoE, leaving investors waiting until the 23rd  of October before the minutes of the meeting are released.   The lack of change in policy failed to spark any movement in the pound, with GBPUSD relatively quiet during overnight trade, pivoting in the mid-1.59s as we get set for the North American cross.

As we head into the North American open, equity futures look set to charge out of the gate when the opening bell rings, fueled by reports that the President will be meeting with House Republican leaders later today, and that both sides are getting closer to accepting a short-term (one-month to 6 weeks) funding and debt ceiling extension.   In addition, chatter from Capitol Hill seems to suggest the Republicans are backing away from fighting over the deferral of the Affordable Care Act, and will now be focusing on other spending issues and sequestration.   The DXY is garnering some bids this morning, with the USD gaining against the JPY as the safe-haven trade reverses course somewhat.   After USDCAD touched up to one-month highs overnight, the Loonie has managed to claw back those losses, outperforming on its crosses and buoyed by strong equity performance and gains in the energy complex.   USDCAD is pivoting below the 1.04 handle heading into the North American open, while front-month WTI is trying to retake the $102/barrel level after gaining 0.33% after yesterday’s close.

On the economic docket later today, at  8:30am EST  we will get weekly jobless claims out of the US, along with the New Housing Price Index in August for the Canadian economy.   Jobless claims for the week ending September 29th  are forecast to come in around the average we’ve been seeing over the past few weeks, expected to print at 310k, slightly higher than the previous week of 308k.   The new housing index in Canada is forecast to continue to make the slow and steady gains its seen for the majority of this year, with expectations will see a the pace of increase remain unchanged from the previous month at 0.2%.

Looking ahead to  tomorrow, the main event for Loonie traders will be the release of the employment numbers for the month of September.   Expectations are to see a modestly positive print, with the Canadian economy creating only 10k jobs over the previous month.   The median analyst forecast is in-line with the average number of jobs created each month going back to the beginning of this year, however labour market conditions have been volatile, with large swings in either direction on a monthly basis.   While it is a relatively small sample size, the average number of jobs created on a monthly basis is just under 13k, with the standard deviation being 52k jobs.   Therefore, with a confidence interval of 68.2%, we can be sure the number of jobs created over the month of September will fall between +65k and -39k.   This highlights there is a high probability that we see a large deviation from what economists are expecting, which could create the potential for volatile trading conditions  Fridaymorning; make sure to speak with your dealing teams in order to discuss trading strategies that would be useful to take advantage of heightened volatility levels.

Further reading:

US jobless claims leap to 374K data skewed – dollar falls

BOE provides no drama – GBP/USD ticks higher