What Are The Markets Facing?

The US stock and bond markets are closed for trading on Friday in observance of Independence Day, but the foreign exchange markets are open. Although the economic calendar is very light, Canada will be releasing what can typically be a very market moving indicator for the Canadian dollar – IVEY PMI. The IVEY PMI report measures the country’s manufacturing activity which tends to be a strong leading indicator for growth. In May, manufacturing activity improved materially with the index rising to the highest level in 11 months. For the month of June, strong wholesale sales and an improvement in leading indicators suggests that manufacturing activity should hold near its highs. Although oil prices hit a new record today, the Canadian dollar has barely reacted as it strengthened against the Japanese Yen but weakened against the dollar. Part of currency’s stubbornness has been concerns that slower US growth would lead to slower Canadian growth. However a strong IVEY PMI report would indicate that the Canadian economy is more resilient than the market thinks, which would be bullish for the CAD. If it falls short of expectations by retracing from its high levels, then those concerns about slower growth will be validated.

Bonds – 10-Year Canadian Government Bond Futures

Canadian Government Bonds have been trading in an increasingly tight range since the middle of May. The last time the Bank of Canada altered interest rates was back in April. The main reason why bonds have barely moved is because the BoC is expected to remain on hold for the remainder of the year. Bond prices however are itching for a breakout with a clear triangle in formation. Resistance is at 117.97 while support lies at 116.75. A good IVEY PMI number could take prices lower and yields higher while a weak number could trigger a break of 117.97.

FX – CAD/JPY

CAD/JPY would be the biggest beneficiary of a strong IVEY PMI number. The market has turned dollar bullish after it learned that the non-farm payrolls report failed to threaten the current trajectory of Fed monetary policy. This helped to lift USD/JPY as well as the other yen crosses. CAD/JPY has been trapped in a very tight range over the past 4 trading days. A strong IVEY PMI number could take the pair above 105.30, which is the resistance level created by the10 and 20day SMA. A weak number would take CAD/JPY towards the July 1 low of 103.15.

Equities – S&P/TSX Composite Index

The Canadian equity markets have taken a big hit over the past 2 weeks. This has been largely due to the meltdown in the US stock market which dragged global indices lower. Today, Canadian shares recovered significantly after hitting a new 2 month low intraday thanks to the rally in the Dow and the new record in oil prices. If the IVEY PMI figures come in as expected or lower, then the stock market should head towards a support level at 13650. However, implications of stronger than expected PMI should see the market rally towards a near term resistance level at 14400, as participants would interpret the release as signs of sustained growth in the business sector.

Terri Belkas is a Currency Strategist at FXCM.