Net Change in Employment (MAY) (11:00 GMT)
Expected: 14.3K
Previous: -5.2K

Int’l Merchandise Trade (APR) (12:30 GMT)
Expected: C$4.8B
Previous: C$4.6B

How Will the Markets React?

Given the strength behind the Canada’s currency and the yields on its government bonds, there seems little need for economic fuel to keep things moving. In fact, a bad print on a big name indicator could actually threaten pumped up forecasts for Canadian growth and burgeoning speculation behind a return to rate hike for the Bank of Canada. Consequently, investors and traders will anxiously monitor the newswires tomorrow to see how three of the nation’s top market moving indicators print. The first, and arguable most important, report tomorrow will cover the labor trend numbers. According economists, Canadian employers added 14,300 new hires to the payrolls following the first contraction in eight months. There is little ancillary data available to back up these predictions, though the 11-month high in the employment component of yesterday’s Ivey business activity gauge is promising. This flimsy report aside, the employment change number is notoriously difficult to forecast and is prone to volatile changes. Taking this into consideration, a second contraction could shake confidence in Canada’s steady pace of growth and in turn jeopardize the hike that interest rate traders are pricing in by September. To really set the bulls off pace, an increase in the unemployment rate from its three-decade low 6.1 percent would spark concerns of a pull back in consumer spending. Moving along the docket, starts - the headline housing sector number - for May is expected to also improve slightly. Once again, expectations are skewed to the upside with the market looking for a modest pick up in the annual pace to 215,000 building and there is little beyond a modest contraction in permits for the previous month to draw forecasts from. Finally, 15 minutes after the housing number, the international trade account will wrap things up with (what else) a modest improvement. Looking ahead to tomorrow, it would only take one big negative surprise to contaminate the oversaturated bulls.

Bonds – 10-Year Canadian Government Bond Futures

Yields on Canadian government bonds have seen the same buoyancy from investor confidence that has driven the Canadian currency to thirty-year highs against its US counterpart. In the past few weeks, economic data has led analysts and traders to seriously consider a 25 basis point rate hike from the central bank by the third quarter; while the more dated section of the yield curve is actually pricing a 4.75 percent overnight lending by the end of the year. Looking at action in futures on the ten-year Canadian government bond, prices marked a considerable gap lower on the open as spot rushed through 111.00 support. Given today’s break, the move has already been made for treasury bears should the employment and trade cross the wires in line with or above expectations.

FX – USD/CAD

Has USD/CAD finally found a bottom? We won’t venture to call a turn, but we will be looking at the release of Canadian employment data on Friday morning. The figures are anticipated to show that the labor market took on an additional 14,300 workers during the month of May after shedding workers during the month prior. Such a release would be quite bullish for the Canadian dollar, as this highly market-moving indicator would reiterate the Bank of Canada’s concerns that a tight labor market will drive wages, and subsequently inflation, higher. However, USD/CAD declines will have difficulty near the 1.0550 level, as formidable support put an end to the Canadian dollar rally three days ago. On the other hand, a disappointing labor market report has to potential to unleash a massive sell-off of the Canadian dollar, as traders are just waiting for a USDCAD turn and will use any ammunition they can to drive the pair higher.

Equities – S&P/TSX Composite Index

Canadian stocks fell on Thursday, sending the S&P/TSX Composite Index down 1.7 percent to 13,703.88 - its biggest two-day drop in a year - on concerns that rising global interest rates will crimp profits, reduce demand for loans and lower the appeal of dividends. Bank of Nova Scotia fell C$0.69 cents to C$51.28 after an analyst from Scotiabank reduced forecasts on third-quarter earnings for Canadian banks, saying that the appreciating Canadian dollar will hurt their profits. Meanwhile, Canadian Imperial Bank of Commerce fell C$1.66 to C$97.34 after the nation's fifth-biggest bank was sued this week by a Toronto teller claiming damages for unpaid overtime. Raw-materials and energy stocks also took a hit, as prices of gold and copper dropped even as crude oil rose to a nine-month high. As a result, Goldcorp Inc., Canada's second-biggest bullion miner eased back C$0.87 C$25.30 while Teck Cominco Ltd., a miner of zinc and copper, dropped C$1.32 to C$44.03.

Equities could continue to disappoint as Canadian employment data is anticipated to show improvement, and looking at past releases, surprises to the upside tend to lead to lackluster gains or outright losses in the S&P/TSX Index. The 7:00 EST release is forecasted to show that the labor market added on an additional 14,300 workers. With the Bank of Canada already concerned that wage growth will add to mounting inflation pressures, equity traders may continue to flee in fear of a July rate hike and lead the S&P/TSX down below 13,700. On the other hand, a return to more bullish stock market sentiment could override the Canadian economic data and push the benchmark index higher.

John Kicklighter is a Currency Strategist at FXCM.