What Are The Markets Facing?

The release of Canadian inflation data is likely to remind the markets of the Bank of Canada’s surprise decision to leave rates steady at 3.00 percent, as they called rates “appropriately accommodative”. Headline CPI is forecasted to rise to 1.9 percent in May from a year earlier, up from 1.7 percent. On the other hand, the Bank of Canada’s core measure is expected to hold steady at 1.5 percent, which is well below the Bank’s 2.0 percent target. Nevertheless, any sort of pick up in these CPI results will only underpin the Bank of Canada’s view that “the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside.” Furthermore, the Bank said that if “current levels of energy prices persist, total CPI inflation will rise above 3 percent later this year.” Regardless of the result, if this inflation data proves to be unexpected, the Canadian markets are likely to respond immediately, though the risks are greater for a strong CPI report to completely eliminate any expectations for additional rate cuts.

Bonds – 10-Year Canadian Government Bond Futures

Canadian Government Bonds have extended their rally toward resistance at 116.75, but the upcoming release of Canadian CPI could shake the contract up. The data is expected to reflect an increase in price pressures in the Canadian economy, which would underpin the Bank of Canada’s inflation concerns and eliminate prospects for additional rate cuts. As a result, there is potential for CGBs to pull back toward support at 115.75/116.00. On the other hand, surprisingly weak numbers could send the contract jumping to 116.75.

FX – USD/CAD

USD/CAD continues to consolidate within a wide range of 0.9750/9800 – 1.0350, but over the course of the past week, the pair has shown hesitance to break below near-term support at 1.0150. According to Technical Strategist Jamie Saettele, the odds are in favor of a USD/CAD rally to at least 1.05 (see his Daily Technical Report for more). Will upcoming Canadian event risk work in favor of this scenario? Not at all, given current expectations for Canadian CPI to jump to 1.9 percent from 1.7 percent. Indeed, the Bank of Canada issued a somewhat hawkish policy statement following their last meeting, which strong inflation figures would only support. As a result, there is some potential that we could see USD/CAD test 1.0150 once again, and possibly slip as low as 0.9967. On the other hand, softer-than-expected CPI figures could propel USD/CAD higher, in line with Jamie’s technical layout, as the data would suggest that the Bank of Canada’s inflation fears are unwarranted for now.

Equities – S&P/TSX Composite Index

While most global stock markets have tumbled over the past few weeks, Canadian equities have held up and continue to trade near record highs as energy shares propel the S&P/TSX Composite Index higher. However, resistance at 15,100 remains solid and if oil prices start to back down again, the S&P/TSX could as well. Upcoming event risk includes the release of Canadian CPI, which is expected to reflect a pick up in inflation pressures. If the index rises in line with expectations and underpins the Bank of Canada’s inflation concerns, the S&P/TSX could pull back below the psychologically important 15,000 mark. On the other hand, weaker-than-expected CPI figures could send Canadian shares shooting higher for another test of 15,100.

Terri Belkas is a Currency Strategist at FXCM.