Canada's stock and currency markets treaded water on Monday and trade was expected to remain largely subdued as talks by U.S. politicians to prevent the "fiscal cliff" of tax hikes and spending cuts due on New Year's Day remained deadlocked.
The trend was seen globally. U.S. stock markets were slightly weaker, while financial markets across Asia and Western Europe were largely mixed with exchanges either closed or closing early as lawmakers bickered over a solution to the looming $600 billion cliff.
The Canadian dollar, which got a small boost from stronger-than-expected Chinese manufacturing data, was expected to trade within a tight range as the world waited for Democrats and Republicans to agree on a deal.
There's a "tremendous sensitivity to the headline risk today" with respect to the cliff, said Jack Spitz, manager director of foreign exchange at National Bank Financial.
"An agreement to push forward the tax hikes and budget cuts will create an environment for U.S. economic growth, which we expect will also equate to Canadian growth. This is why successful developments around fiscal cliff negotiations are ultimately a positive influence for the Canadian dollar," said Spitz.
"Lack of an agreement creates a U.S. and a Canadian recessionary environment."
Midmorning on Monday, Toronto's S&P/TSX composite index was slightly higher at around 12,340, while the Canadian dollar hovered near US$1.0048.
Failure to secure a deal by the midnight deadline would effectively push the U.S. economy into recession, and the ripples would be felt worldwide, experts have said.
In a rare appearance on NBC's "Meet the Press" on Sunday, President Barack Obama discussed the gridlock's impact on markets.
"What's been holding us back is the dysfunction here in Washington," he said. "If people start seeing on January 1st this problem still hasn't been solved ... then obviously that's going to have an adverse reaction in the markets."
The key sticking point between Republicans and Democrats appears to be whether to extend existing tax rates for everyone or just for those earning below $250,000 to $400,000. That threshold may be rising closer to a level of $500,000 or so, Reuters reported.
"This thing is really being used as a political football," said Thomas Caldwell, chairman of Caldwell Securities.
"They're going to come up with a Band-Aid of some kind," he said, referring to the flat market trade on Monday. "They're not going to be able to deal with the real problem at hand. They're just going to avert or kick the can down the road."