Although the U.S. government has never officially defaulted on its debt, it missed payments on some Treasury Bills in 1979. Then as now, Congress was playing a game of chicken with Republicans and Democrats bumping heads on raising the debt ceiling. The debt limit was a fraction of its current levels and at the time, the dollar only fell briefly. The 0.6 percent drop in the Dollar Index was so small that it was barely left an imprint. However less than a month later, double digit inflation and concerns about the outlook for the U.S. economy along with the security of the U.S. dollar drove the greenback sharply lower. It may be tempting to attribute this decline to the short term default on U.S. debt but the Treasury started making its T-bill payments again after a very short delay.
Here’s a chart of how the dollar behaved when the U.S. government missed its debt payment in 1979
In the middle of February, when USD/CAD was trading at 1.2515, I talked about how it could hit 1.28. Now that this target has been reached, the move could extend to 1.30.
At the time, I argued that the shrinking trade deficit in the US and the first trade deficit for Canada in 32 years would lead to more strength for USD/CAD. This morning, Canadian GDP numbers were much weaker than expected. In the fourth quarter, the economy contracted at the fastest pace since 1991, 17 years ago.
USD/CAD is also trading higher because of broad dollar strength. The dollar has skyrocketed as the Dow breaks 7k to hit the lowest level in 11 years.
USD/CAD is trading well into the Bollinger Buy Zone which i mentioned on Feb 11. There is scope for a bit of a retracement, but as long as the currency pair holds above 1.2600, we could see a move to 1.30. If USD/CAD does manage to trade at 1.30, we could see a gap higher.
Poor Canada has a lot more trouble ahead due to its sensitivity to the US economy. The only silver lining is the rally in oil prices.
The US trade deficit narrowed materially in the month of November to the smallest since June 2003. Although the narrower trade deficit is normally something to cheer about, the details of the report indicate that the only reasons why trade improved was because of the fall in oil prices and slower domestic demand. The big story is in imports, which plunged 12 percent in November. Unfortunately the strength of the dollar did not drive stronger US demand for foreign goods but it did cut exports by 5.8 percent. The US dollar strengthened following the report but the gains may be limited because the report reflects the weakness rather than strength of the US economy.
Meanwhile Canada is at the brink of turning a deficit for the first time in 10 years. Their trade surplus shrank to 1.3B in November, the smallest since October 1997. The toxic combination of falling oil prices and weaker US demand for vehicles has caused exports to drop 6.8 percent the fourth consecutive month.
Unsurprisingly, USD/CAD has soared the following the better trade report from the US and weaker report from Canada. Expect the currency pair to hit 1.2375 as long as it holds above the 1.2150, today’s low.