What Are The Markets Facing?

The only significant event risk on Friday will be from the release of the Canadian net employment change. This release is essentially “the other NFP” report, as the data tends to be highly market-moving for the Canadian dollar and rarely meets estimates. Lately, the net employment change has shown resilience, which has allowed domestic demand to remain strong. Indeed, during the month of April, wholesale sales unexpectedly jumped 1.4 percent while retail sales (ex. Autos) rose 1.1 percent. Meanwhile, the most recent Ivey PMI report reflected a sharp rise in business activity, as the index jumped to a reading of 69.6 from 62.5. A breakdown of the index showed prices soaring, which is in line with the recent surge in CPI above the Bank of Canada’s 2 percent target to 2.2 percent. Meanwhile, the employment component eased slightly to 58.2, but still remains very much in expansionary territory (above 50), indicating some potential for strong labor market figures from Statistics Canada. Such a result would spark substantial volatility for Canadian assets in the short-term, but given the Bank of Canada’s cautious tone in their June policy statement that noted downside risks to growth and upside risks to inflation, the Bank is highly unlikely to change rates anytime soon.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have slowly climbed higher in recent weeks, though its rally was cut short at resistance at 118.28. The upcoming release of Canadian employment numbers may be key to the next move in CGBs, as they could impact interest rate expectations for the Bank of Canada. The net employment change is anticipated to reflect an improvement in labor market conditions, which could weigh CGBs back below 118. On the other hand, a surprisingly weak reading could send the contract above near-term resistance toward 119, as traders judge that the Bank of Canada will leave rates steady going forward.

FX – USD/CAD

The USD/CAD remains range-bound from 0.9700 to 1.0350, and continues to hold near the upper end of the range. The unexpected change in policy by the Bank of Canada at last month’s meeting has spurred mixed sentiment for the Canadian dollar, and any improvements in economic activity may help the currency to advance further. Market participants expect the unemployment to hold at 6.1 percent, and forecasts employment to rise by 8K for the month of June. If the release crosses the wires in line with expectations, the pair may fall below near-term support at the 50 and 100 SMAs at 1.0076/90 for a test of parity. On the other hand, if labor conditions turn worse, the pair could rally toward 1.02.

Equities – S&P/TSX Composite Index

Recent turmoil in the financial sector paired with fading export demand has cooled economic activity in Canada and had led the S&P/TSX down from its peak above 15,100 in recent weeks. Indeed, the index has even broken below the 200 SMA at 13,861, but has since stabilized above the 50 percent fib of 11,983 – 15,155 at 13,569. The Canadian employment index will be the main event risk for Canadian equities tomorrow, with market participants anticipating labor conditions to slightly improve. If the release rises in line with expectations, the index could surge toward 14,000. However, disappointing figures may fuel bearish sentiment among traders, and could lead the index to test for support at 13,500.

Terri Belkas is a Currency Strategist at FXCM.