Given the strength behind the Canadas currency and the yields on its government bonds, there seems little need for economic fuel to keep things moving…. … In fact, a bad print on a big name indicator could actually threaten pumped up forecasts for Canadian growth and burgeoning speculation behind a return to rate hike for the Bank of Canada.

Consequently, investors and traders will anxiously monitor the newswires
tomorrow to see how three of the nations top market moving indicators
print. The first, and arguable most important, report tomorrow will
cover the labor trend numbers. According economists, Canadian employers
added 14,300 new hires to the payrolls following the first contraction
in eight months. There is little ancillary data available to back up
these predictions, though the 11-month high in the employment component
of yesterdays Ivey business activity gauge is promising. This flimsy
report aside, the employment change number is notoriously difficult to
forecast and is prone to volatile changes. Taking this into
consideration, a second contraction could shake confidence in Canadas
steady pace of growth and in turn jeopardize the hike that interest rate
traders are pricing in by September. To really set the bulls off pace,
an increase in the unemployment rate from its three-decade low 6.1
percent would spark concerns of a pull back in consumer spending. Moving
along the docket, starts – the headline housing sector number – for May
is expected to also improve slightly. Once again, expectations are
skewed to the upside with the market looking for a modest pick up in the
annual pace to 215,000 building and there is little beyond a modest
contraction in permits for the previous month to draw forecasts from.
Finally, 15 minutes after the housing number, the international trade
account will wrap things up with (what else) a modest improvement.
Looking ahead to tomorrow, it would only take one big negative surprise
to contaminate the oversaturated bulls.

Bonds – 10-Year Canadian Government Bond Futures

Yields on Canadian government bonds have seen the same buoyancy from
investor confidence that has driven the Canadian currency to thirty-year
highs against its US counterpart. In the past few weeks, economic data
has led analysts and traders to seriously consider a 25 basis point rate
hike from the central bank by the third quarter; while the more dated
section of the yield curve is actually pricing a 4.75 percent overnight
lending by the end of the year. Looking at action in futures on the
ten-year Canadian government bond, prices marked a considerable gap
lower on the open as spot rushed through 111.00 support. Given todays
break, the move has already been made for treasury bears should the
employment and trade cross the wires in line with or above expectations.

FX – USD/CAD

Has USD/CAD finally found a bottom? We wont venture to call a turn,
but we will be looking at the release of Canadian employment data on
Friday morning. The figures are anticipated to show that the labor
market took on an additional 14,300 workers during the month of May
after shedding workers during the month prior. Such a release would be
quite bullish for the Canadian dollar, as this highly market-moving
indicator would reiterate the Bank of Canadas concerns that a tight
labor market will drive wages, and subsequently inflation, higher.
However, USD/CAD declines will have difficulty near the 1.0550 level, as
formidable support put an end to the Canadian dollar rally three days
ago. On the other hand, a disappointing labor market report has to
potential to unleash a massive sell-off of the Canadian dollar, as
traders are just waiting for a USDCAD turn and will use any ammunition
they can to drive the pair higher.

Equities – S&P/TSX Composite Index

Canadian stocks fell on Thursday, sending the S&P/TSX Composite Index
down 1.7 percent to 13,703.88 – its biggest two-day drop in a year – on
concerns that rising global interest rates will crimp profits, reduce
demand for loans and lower the appeal of dividends. Bank of Nova Scotia
fell C$0.69 cents to C$51.28 after an analyst from Scotiabank reduced
forecasts on third-quarter earnings for Canadian banks, saying that the
appreciating Canadian dollar will hurt their profits. Meanwhile,
Canadian Imperial Bank of Commerce fell C$1.66 to C$97.34 after the
nation's fifth-biggest bank was sued this week by a Toronto teller
claiming damages for unpaid overtime. Raw-materials and energy stocks
also took a hit, as prices of gold and copper dropped even as crude oil
rose to a nine-month high. As a result, Goldcorp Inc., Canada's
second-biggest bullion miner eased back C$0.87 C$25.30 while Teck
Cominco Ltd., a miner of zinc and copper, dropped C$1.32 to C$44.03.

Equities could continue to disappoint as Canadian employment data is
anticipated to show improvement, and looking at past releases, surprises
to the upside tend to lead to lackluster gains or outright losses in the
S&P/TSX Index. The 7:00 EST release is forecasted to show that the labor
market added on an additional 14,300 workers. With the Bank of Canada
already concerned that wage growth will add to mounting inflation
pressures, equity traders may continue to flee in fear of a July rate
hike and lead the S&P/TSX down below 13,700. On the other hand, a return
to more bullish stock market sentiment could override the Canadian
economic data and push the benchmark index higher.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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