Canadian Ivey PMI (JAN) (15:00 GMT; 10:00 EST)
Expected: 47.0
Previous: 45.9

What Are The Markets Facing?

Canadian business activity is expected to remain tepid in January, as Ivey PMI is forecasted to remain below the 50 boom/bust level for the second consecutive month, signaling broad pessimism amongst purchasing managers. Indeed, in December, Ivey PMI fell below that critical level for the first time in a year and if the figure is released in line with forecasts, it will be the first time since the months following September 11, 2001 that PMI signaled contraction for more than one month. Economic conditions in Canada have been shaky in recent months, as lackluster export demand from the US takes a toll on manufacturers. Furthermore, as producers cut back on output, they also cut back on hiring workers as reflected in December’s labor market reports. In fact, the employment component of Ivey PMI fell sharply in December while the net employment change, which fell by 18,700, was led by a 33,200 drop in the manufacturing sector and a 22,600 loss in the agriculture sector. As a result, the markets will be watching the release of Ivey PMI not only as a gauge of the status of the business sector, but as a leading indicator for Friday’s highly market-moving Canadian employment data. If the news proves to be disappointing, fears that Canada with follow the US into a major economic slowdown will pervade throughout the Canadian financial markets.

Bonds – 10-Year Canadian Government Bond Futures

After bottoming out near 115.75, Canadian government bonds have rallied quite a bit amidst a return to risk aversion. The contract has blown through resistance at 117.03 and could be targeting the 117.44/50 area, and the release of Ivey PMI may only raise the chances of such a move as the figure is expected to print below 50 for the second consecutive month. The news could lead traders to increase speculation that the Bank of Canada will cut rates at their next meeting and propel CGBs towards 118. On the other hand, a surprise improvement above the critical 50 mark could weigh the contract back down below 117.

FX – USD/CAD

The release of Ivey PMI provides significant event risk for USD/CAD, as last month’s print of a disappointing 45.9 – the first under the boom/bust level of 50 since December 2006 – propelled the pair over 150 points. The Loonie has recently fought back after the pair ran into 200 SMA resistance at 1.0376 – which was the highest since September 14, 2006 – though it appears to have found solid support at the 38.2% Fibo level of the 0.9056-1.0376 bull run at 0.9880. Considering that markets are already starting to price in another Fed rate cut in March, a stronger-than-expected Ivey PMI report may send the pair tumbling as it would support the case for neutral policy by the Bank of Canada going forward. However, a disappointing print may set the pair up for a rally as investors will ramp up speculation that the BoC will have to continue to cut rates in step with the Fed to prevent a sharp economic slowdown.

Equities – S&P/TSX Composite Index

Despite rallying off of the yearly low of 12,011 on 1/22 after rate cuts by the Bank of Canada and the Federal Reserve, the S&P/TSX index still remains down over 4% for the year. Although, recession fears have started to dissipate on the belief that the rate cuts will start to propel growth, investors are still proceeding cautiously as labor data has printed weak for both the US and Canada and amidst concern that consumption may deteriorate further. Although the Ivey PMI is expected to show a mild improvement after printing at its lowest level since 2001, it is expected to remain below the 50 boom/bust level, signaling a slowdown in business spending. Should the number disappoint as did the previous month it may stoke recession fears and send the index tumbling back below 13,000. However, a print above the 50 boom/bust level would give confidence to investors that the rates cuts are having their intended affect and would bring the bulls back to the market.

Terri Belkas is a Currency Strategist at FXCM.