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MAR 25

Canadian GDP (MoM)(JAN) (12:30 GMT; 08:30 EST)
Expected: 0.4%
Previous: -0.7%

What Are The Markets Facing?

The Canadian economy has continued to remain resilient in the face of a U.S. and global slowdown, which the upcoming January GDP reading is expected to confirm. The monthly growth measurement is expected to have improved in January to 0.4% from -0.7% the month prior. Unlike other nations which are facing rising inflation and slowing growth, Canada saw inflation ease 0.2% and increases of 2.6% and 1.5% in wholesales and retail sales respectively. Additionally, the country can boast strong labor and housing markets, which was evidenced by unemployment falling to 5.8% and housing starts jumping 256.9K. Despite the culmination of all the positive fundamental data, which includes a widening trade surplus, many still expect the BoC to cut rates by 50 points at their next meeting. However, some are starting to call into question the pace of the cuts, feeling that the MPC may be moving too hastily in an attempt to match the Fed. The U.S., Canada’s main trading partner, has continued to show signs of entering a mild recession, which calls into question the sustainability of the country’s current growth. However, considering that the main culprit to economic weakness in the U.S. has been tight credit markets and a housing downturn, neither which have affected its neighbor to the north. If the Canadian economy can continue to sustain growth in the face of the weakening U.S., then Governor Carney and the MPC may start to reconsider their dovish bias, despite easing inflation giving them a free pass to cut rates.

Bonds - 10-Year Canadian Government Bond Futures

Canadian government bonds have consolidated as traders weigh the robust Canadian economy against the Impact of the U.S. slowdown. Additionally, as the quarter comes to end traders are reluctant to make moves as they get their books in order. Upcoming, GDP will give them something to trade off of as the report may tilt the balance in the debate of how resilient the Canadian economy.

FX - USD/CAD

The USD/CAD has continued to consolidate above the 200-Day SMA, as traders continue to look for signs that the Canadian economy is being impacted by the U.S. slowdown. The speculation that both the BoC and the Fed will cut rates by 50 points has left Loonie bulls and bears in a stalemate. There seems to be a general uncertainty surrounding the Canadian dollar as it has started to consolidate against most of the major currencies. The consensus is that the Canadian economy will ultimately be affected by the US slowdown, but until there are clearer signs the pair may remain in its current trading range. However, the loonie is starting to get support as commodity prices resume their record setting ways, with oil leading the way after the bombing of an Iraqi pipeline. Upcoming GDP will provide further insight into how long the economic fundamentals can remain strong. Any sign of softening in the economy may lead to the loonie depreciating, especially against the major crosses. A break above 1.02 may see the pair test resistance at 1.0370. If as expected the economy continues to demonstrate strength then Loonie bulls will look to bid the pair back under parity.

Equities - S&P/TSX Composite Index

The S&P/TSX is coming off of five days of gains as confidence grew that the financial crisis is dissipating. The benchmark has risen over 5% since March 19 as financials were the main beneficiaries of the easing fear. However, as concerns over the impact of the U.S. slowdown still lingers, the outlook for future earnings diminishes, and traders may look to start locking in profits. A clear doji candle may have signaled the end of the recent equities rally and epitomized the uncertainty that confounds traders. 13500 may prove to be a significant resistance level for the index as it failed to break it, for a second time. A stronger than expected GDP print will go along way toward continuing the markets recent bullish trend. However, weakening growth should flow through to stocks, as earnings expectations dwindle.

DailyFX

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