The tight Canadian credit markets have remained a concern for the BoC. Therefore, the central bank will infuse another C$2 billion in liquidity into the market on April 17, when they purchase securities with treasuries. The MPC’s fretting has led to expectations that they will cut rates by 50 points at their upcoming April 22 meeting.



What Are the Markets Facing?

The tight Canadian credit markets have remained a concern for the BoC. Therefore, the central bank will infuse another C$2 billion in liquidity into the market on April 17, when they purchase securities with treasuries. The MPC’s fretting has led to expectations that they will cut rates by 50 points at their upcoming April 22 meeting. Despite concerns over lending standards and a U.S. downturn, the Canadian economy has remained resilient. A strong labor market, built on the commodity boom has fueled domestic growth and saw the economy generate another 14,600 jobs in March. Likewise record oil prices have seen the physical trade balance reach a nine month high of C$4.9 billion, as energy exports have increased. Another positive sign for the economy is the recent tripling of expectations in factory shipments on higher automobile orders. Nevertheless, Governor Carney has cut rates 100 points since the subprime crisis started, as the U.S. slowdown is expected to eventually impact the Canadian economy. The only obstacle to a rate cut may be the upcoming inflation report, as rising energy and food costs have increased worldwide, leaving many policy makers reluctant to reduce interest rates. However, with current the current CPI level of 1.8% below the central banks target of 2% and expected to go lower, an uptick would not raise concerns for Canadian decision makers.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have consolidated ahead of the upcoming BoC rate decision. The combination of bullish fundamental data and returning risk appetite has offset the speculation of a future rate cut. Easing inflation may give CGB’s a boost as it would clear the way for another rate cut by the MPC. An appreciation in prices may reduce expectations of further easing and weigh bonds lower.

FX – USD/CAD

The recent anti-dollar sentiment currently in the markets has pushed the USD/CAD below the 200 Day SMA and support at 1.0040. Parity will be the next level of resistance for the pair, as the psychological level hasn’t been breached since March 19. The “loonie strength is somewhat surprising considering the anticipation that the BoC will cut rates at their next meeting. The upcoming inflation data isn’t expected to have an impact on the central banks decision. Nevertheless, traders will keep an eye on the data as it is traditionally significant factor in the MPC’s decision making process. Therefore, a surprise increase in inflation may perpetuate the current Canadian dollar rally. However, if prices continue to ease, then there will be a clear path for rate cuts and the potential increase in interest rate differential will put downward pressure on the ‘Loonie” which may send the pair back above its 200 day SMA.

Equities – S&P/TSX Composite Index

The S&P/TSX Composite Index is coming off of consecutive days of gains led by energy stocks, which received a boost from record oil prices, which rose above $13 a barrel. The index has broken through resistance and is currently receiving a boost from better than expected manufacturing shipments. The recent commodity boom and a belief that the credit crisis is nearing an end as seen the equities rally over 100 points since mid March. The upcoming inflation data is expected to show prices easing, which will allow the BoC to cut rates unfettered. This scenario would create a bullish stock environment that may push the index toward 14500. However, a significant rise in inflation may spark fear that rising prices will reduce the chances of a rate cut and begin to deter consumer spending, The bearish news may weigh on the index, reversing its current gains with support at the 13600.

Terri Belkas is a Currency Strategist at FXCM.