Canadian business activity is expected to slow in April, as Ivey PMI is forecasted to slip for the second consecutive month to 54.0 from 59.0. Conditions in the Canadian economy are very mixed, as the Bank of Canada described in their Monetary Policy Report in April: ”Growth in the global economy has weakened since the January Monetary Policy Report Update, reflecting the effects of a sharp slowdown in the US economy and ongoing dislocations in global financial markets. Growth in the Canadian economy has also moderated.

What Are the Markets Facing?

Canadian business activity is expected to slow in April, as Ivey PMI is forecasted to slip for the second consecutive month to 54.0 from 59.0. Conditions in the Canadian economy are very mixed, as the Bank of Canada described in their Monetary Policy Report in April: ”Growth in the global economy has weakened since the January Monetary Policy Report Update, reflecting the effects of a sharp slowdown in the US economy and ongoing dislocations in global financial markets. Growth in the Canadian economy has also moderated. Buoyant growth in domestic demand, supported by high employment levels and improved terms of trade, has been substantially offset by a fall in net exports.” Furthermore, the outlook for Canadian trade is rather dismal, “as exports are projected to decline, exerting a significant drag on growth in 2008,” while “business and consumer sentiment in Canada is expected to soften somewhat.” As a result, it will not be entirely surprising to see the April Ivey PMI report reflect slowing business activity, and if anything, there is some risk that this figure could be even more disappointing than currently expected. Traders will also be keeping a close eye on the employment component ahead of Friday’s release of Canadian labor market data, as this tends to serve as a good leading indicator.

Bonds – 10-Year Canadian Government Bond Futures

Though Canadian government bonds ended the day below 50 SMA, the contract could continue to test resistance at the 118.80/119.00 level, especially if Canadian equities tumble. Upcoming event risk includes the release of Ivey PMI, as a disappointing reading could propel CGBs higher as the markets price in additional rate cuts by the Bank of Canada. On the other hand, a surprise jump in the figure could weigh the contract down below support at 118.

FX – USD/CAD

The release of Ivey PMI provides significant event risk for USD/CAD, as last month’s disappointing print helped buoy the pair above parity. The Loonie has done nothing but consolidate between 1.0000-1.0250 over the past few weeks, but considerable support looms below as the 100 and 200 SMAs converge with rising trendline near 1.0060. Considering that markets are speculating that the Federal Reserve’s rate cut cycle may be over, there is a risk that US dollar strength could serve to propel USD/CAD higher in coming weeks. As a result, a weaker-than-expected Ivey PMI release could spark significant Canadian dollar losses. On the other hand, a stronger-than-expected Ivey PMI report may send the pair tumbling toward noted support as it would support the case for neutral policy by the Bank of Canada going forward.

Equities – S&P/TSX Composite Index

The S&P/TSX index has run headlong into resistance at the April high of 14,372, though the index has since backed off. Is this the end of the line for the rally in Canadian equities? That may have more to do with commodities, as rocketing crude oil and copper prices have led shares of commodity producers like Teck Cominco and EnCana to surge. Nevertheless, the upcoming release of Ivey PMI could lead to some directional price action in the S&P/TSX if the news is surprising. Current expectations are for PMI to fall to 54.0 from 59.0, reflecting slowing business activity. However, if the index were to fall below the 50 level (signaling contraction), the S&P/TSX could pull back toward 14,000. On the other hand, a surprisingly strong reading could push the index above near-term resistance at 14,372.

Terri Belkas is a Currency Strategist at FXCM.