By DailyFX - Over the past four active trading sessions, the Canadian financial markets have been jostled by a number of fundamental events. However, underlying...

... the few economic releases and carry differential speculation overriding action in government debt and the currency.

Crude oil has marked a volatile swing lower. A broad commodity drop began in earnest
on January 3rd, with gold falling 5.6 percent, copper slipping 9.3
percent, and crude plunging 10 percent to their respective lows.
Particularly dear to the Canadian economy, oil prices began their own
decent on Wednesday on surprising weather forecasts and a 2 million
barrel rise in distillate inventories. Already experiencing the warmest
winter weather in years, meteorologists were further predicting weekend
temperatures of up to 70 degrees in the Northeastern US, which accounts
for 80 percent of the countries heating demands. The pervasive response
was easily seen in price action that played out in Canadian equities and
the national currency. Recently, however, the tables have turned. After
coming within cents of a one-and-a-half year low, crude has begun to
pick up on an Eastern-board cold front, speculation of another emergency
OPEC meeting and rumors of an imminent attack by Israel on Irans
nuclear facilities. Now that the fundamentals are beginning to support
oil and the US economic quiets down, the crude correlation may once
again support Canadian assets.

Bonds - Canadian 10-Year Note

Since the commodity markets have been put into motion, the debt markets
have been the least effected. Initially, the instrument provided the
correct response to commodity movements. From a low around 99.60 around
the open of active trading in Canada Wednesday morning, to a 100.03 high
through Friday, the draw on export revenue guided the benchmark asset.
This correlation was thrown off, however, when Canadian and US
employment numbers hit the wires. Canadian payrolls grew four-times
expectations to add 61,600 jobs to the economy. Proving a demand
booster, US NFPs had also bested expectations were their own 167,000
print. When these numbers ran across the ticker, investors scrambled to
correct predications of a rate cut sometime this year. Pushing ahead to
Mondays session, when employment numbers passed and energy prices began
to rebound, the rise in yields (and subsequent fall in price) continued.
When all is said and done though, crude oils influence over debt will
have difficulty guiding government debt as a number of housing
indicators and a trade report put the market in motion.

FX - USDCAD

Canadas economic calendar over the past week was well suited to the
loonie/crude correlation. With an empty first half of the week freeing
traders to the guidance of crude prices, the Canadian dollar began to
slip against its more liquid counterparts. In the USDCAD pairing, energy
movements took the reins when the EIA reported inventory data in the US.
At 15:00 GMT, USDCAD began what would turn into a 100-point advance.
Even when the employment numbers were printed, the reaction was only
temporary. Statistics Canada reported a 61,600 jump in employment,
sending the nations jobless rate to a 6.1 percent to match a 31-year
low. However, the strong implications for the Canadian currency were
almost immediately neutralized by an equally impressive turn for US
employment, which printed only an hour-and-a-half after its Canadian
equivalent. Now, as the new week starts and crude prices initiate a
promising rebound, the Canadian currency looks to do the same across the
board. Oversold conditions against the Japanese yen, US dollar and euro
now set the unit up for further strength in crude prices. Looking ahead,
currency traders will monitor rumors of a possible Israel attack on the
Iranian nuclear plant, the chilly turn in the weather in the US and
Wednesdays EIA inventory numbers to see weather the strength of a
potential retracement will be able to supersede the planned economic
releases due over the next few days.

Equities - S&P/TSX Composite Index

Equities have shown the most clearly defined correlation to weakening
energy prices last week. Over the period, the benchmark S&P/TSX
Composite slipped 3.3 percent. The ailment caused by energy and other
commodities was more easily pinpointed. Energy and Material producer
sectors, which account for nearly 40 percent of the Composite index,
each contracted 6 percent last week. Already, Monday could signal a new
direction for the necessary commodity and subsequent stock index. As
crude prices looked to plug their worst weekly performance since April
of 2005, the S&P/TSX Composite put in for a modest 0.6 percent advance
to 12,553.09. For the energy sector, a 1.1 percent advance formed.
Taking a more intimate look into the industry group, shares of Canadian
oil giant Encana climbed C$0.76 to C$53.35 while those of natural gas
firm Suncor Energy marked a C$0.78 pick up to C$85.87. Going forward, as
weather and geopolitical factors evolve, the influence on the stock
market should prove strong. The only hurdle to a commodity prices
directing shares will be a few pieces of macro economic data (namely
housing starts, new home prices and the international trade account).
However, as projections of economic growth remain staid and interest
rate shifts look a to be a long-ways off, the heavily-weighted energy
sector should take the lead for the S&P/TSX Composite.


Regards,

John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com

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