CAD Wholesale Sales (MoM) (FEB) (12:30 GMT; 08:30 EDT)
Expected: 0.4%
Previous: 2.6%

Leading Indicators (MoM) (MAR) (12:30 GMT; 08:30 EDT)
Expected: 0.0%
Previous: -0.3%

What Are the Markets Facing?

Given the marked slowdown and probable recession in the US, the Canadian economy is now more reliant than ever on domestic demand growth to keep expansion on pace. While the most recent Canadian merchandise trade numbers showed that exports to the US were stronger in February from the month prior, shipments to the US were actually down 1.5 percent from a year earlier. Thus far, domestic demand appears to be holding up, as surging oil prices help keep the energy industry thriving and have led the labor markets to tighten significantly over the past few years. True, we did see the unemployment rate jump up to 6.0 percent in March from 5.8 percent, but this due primarily to a large increase in the number of Canadians re-entering the workforce. Overall, consumer spending has been a boon for the economy, and upcoming data is anticipated to show that conditions remain resilient as Canadian wholesale sales for the month of February are forecasted to rise 0.4 percent. While the correlation between the two reports is not always strong, large swings in the wholesale sector report should be watched as a bellwether for the retail index, which hits the wires next week. Nevertheless, the Bank of Canada’s core CPI measure continues to soften as inflation falls well below their 2 percent target. As a result, the Bank is widely expected to continue cutting rates next week, by possibly as much as 50bps, as they struggle to stabilize the Canadian financial markets and avoid a sharp economic slowdown similar to that of the US.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have recently broken below trendline support as traders pile into equities. The next level of immediate support looms below at 117.50, though more significant Fibonacci support rests at 117.00/03. While risk trends will remain the primary driver of CGBs going forward, Friday’s Canadian data could weigh on the contract if the news is surprisingly strong. On the other hand, if the data reflects deteriorating conditions in the Canadian economy, CGBs could bounce toward a zone of resistance near 118.19 - 118.41.

FX – USD/CAD

After plunging for much of 2007, USD/CAD has done nothing but consolidate its losses within a nearly 600 point wide channel of 0.9650 – 1.0250. More recently, the pair has bounced from trendline support at the psychologically important 1.00 mark, sparked by the release of surprisingly soft Canadian inflation data. If upcoming Canadian data proves to be weaker-than-expected, USD/CAD could continue its rally toward channel resistance at 1.0250, especially as hourly and 240-minute oscillators have turned bullish. On the other hand, signs that domestic demand will be able to offset a slowdown in exports could weigh the pair back down toward parity.

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. While the threat of another bout of market-wide risk aversion creates substantial downside potential for Canadian equities, the S&P/TSX may ultimately test the 14,300 in the near-term. On Friday, Canadian economic data could help propel stocks higher, especially if wholesale sales surge and suggest that domestic demand remains robust. On the other hand, surprisingly weak news could send the index down for a test of near-term support at 14,000.

Terri Belkas is a Currency Strategist at FXCM.