Canadian Dollar May Breach Three-Decade High Through Hot CPI

CPI (APR) (YoY) (11:00 GMT; 7:00 EST)
BoC CPI Core (APR) (YoY) (11:00 GMT; 7:00EST)
Expected: 2.1%
Expected: 2.4%
Previous: 2.3%
Previous: 2.3%

How Will The Markets React?

While there have been a number of indicators from the US, UK and Japan that have hogged international investors? attention, the Canadian markets have been sailing along in the background. Now with the S&P/TSX Composite Index pushing a record, yields flirting with resistance and the Canadian currency charging towards thirty-year highs against the benchmark dollar; the Canadian markets have taken on a new light. Interest will heat up even more tomorrow with the economic calendar finally printing market-movers influential enough to spur breakouts. The action will begin Thursday morning well before the Canadian capital markets open when Statistics Canada releases the consumer-level inflation numbers for the month of April. Economists have projected a rather mixed outcome from the data. Headline price growth is expected to grow only 0.3 percent for the month versus a big 0.8 percent jump the period before. This, in turn, is expected to put the breaks on the annual figure, cooling its brisk 2.3 percent pace to a more tolerable 2.1 percent. Conversely, the Bank of Canada?s core number is actually expected to climb over the same period. The consensus for an acceleration to 2.4 percent would raise the annual figure back up its four-year high and could easily offset a modest pullback in the headline number. On the other hand, looking at the limited periphery data available in the market now, a softer headline number is far from a certainty. In fact, energy prices marked a considerable rebound through the month of April. One serious contradiction to the gasoline argument though was the first contraction in employment in 8 months; though this has hardly had time to filter through. Should the core numbers come in line with expectations and/or the headline figure print better than expected, speculation of a rate hike could find real support. As it is, short-term interest rate futures are almost fully pricing in a rate hike by the year?s end.
Bonds - 10-Year Canadian Government Bond Futures
While short-term interest rate futures reveal markets are fully expecting a quarter-point hike from the Bank of Canada before the end of the year, the active futures contract for the benchmark ten-year Canadian government bond has not seen the same level of confidence over the past few weeks. Bond prices have stalled since the middle of April and have ranged between 113.25 and 112.25 since then. This period of congestion could quickly be brought to an end tomorrow though if the inflation numbers can supply a hawkish surprise. It wouldn?t take much to take out support since traders have kept price action over the past few days pinned below 112.50. Given the official consensus, the core numbers are already on target to force a breakout; but the headline number may trip the move up.


[/B]After USDCAD?s recent bottom missed 30-year lows by just 30 points, the markets have been anxiously awaiting the pair?s next move. Will it turn higher for a massive correction or will it continue to probe lower? Tomorrow?s Canadian economic data could help set the pace, as the Bank of Canada?s core CPI measure is anticipated to rise to 2.4 percent from 2.3 percent - holding well above the central bank?s 2 percent target. A steady build of up inflation pressures could be enough to tilt the risks cited by the BoC even further to the upside and continue to propel the Canadian dollar?s rally. However, technicals may work against major USDCAD declines as substantial support lies below at 1.0965 (the most recent lows) and 1.0930 (the 30-year lows). As a result, if core CPI hits the tape softer than expected, USDCAD could surge up to 1.1169.

Equities - S&P/TSX Composite Index
Canadian stocks rose to a record on Wednesday on speculation that financial companies will report higher profits in the second quarter, sending the S&P/TSX up 0.7 percent to 14,025.03 in Toronto. Bank of Montreal, Canada’s fourth-biggest lender, gained 20 cents to C$69.70 as the bank is scheduled to kick off its so-called “earnings season” when it reports results on May 23. Meanwhile, a drop in gold prices today left Barrick Gold Corp., the largest bullion miner, down 30 cents to C$32.86. Other producers suffered as well, with Goldcorp Inc. down 30 cents to C$25.79.
Dour days could be in store for the S&P/TSX, as inflation pressures are anticipated to heat up. Scheduled to be released at 7:00 EST tomorrow, the Bank of Canada?s core CPI measure is expected to rise to 2.4 percent from 2.3 percent - holding well above the central bank?s 2 percent target. A steady build of up inflation pressures could be enough to tilt the risks cited by the BoC even further to the upside. Furthermore, the greater potential of a rate hike later in the year would be to the detriment of equities, as higher interest rates are considered damaging to the market. As a result, the S&P/TSX could easily return to sub-14,000 levels.