Canadian Dollar On Track For 30-Year Highs With The Aid Of Housing Data

Housing Starts (APR) (12:15 GMT; 08:15 EST)
New House Price Index (MoM) (MAR) (Thursday)
Expected: 215,000
Expected: 0.4%
Previous: 214,000
Previous: 0.5%

How Will The Markets React?

Momentum behind Canadian equities and the local currency seems to be the real deal. In a little over a month, the loonie has advanced over 500 points against the US dollar. Alternatively, the benchmark S&P/TSX Composite Index has enjoyed an unprecedented five-day rally that has forcefully pushed the equities gauge to new highs. Looking back over the economic calendar, this wave of bullish sentiment across the asset classes clearly aligns itself to strong domestic growth trends that have arisen through consumer spending and export demand. Another positive check for the expansionary balance sheet today was an unexpected surge in building permits for March. Kicking off a week of housing-related numbers, the indicator reported a staggering 27.4 percent jump in filings for residential and non-residential permits - the biggest on record. Looking beyond the headline number though, the data was certainly not as impressive as it seemed at first blush. To begin with, the big increase came directly after an equally remarkable 23.3 percent decline in February. A similar, volatile correction was recorded back in January of 2006. What?s more, plans to break ground on new units were largely influenced by unusual weather trends. Nonetheless, when the indicator was broken down into its residential and commercial components, it held its significance by printing a 25.6 percent rebound in housing and a 30.3 percent jump in nonresidential units. Now the market will turn to tomorrow?s housing starts report for April to verify the sudden growth spurt in the sector. Certainly, the starts number will not display the same explosive gains that the leading permits number printed, though it may be open to a considerable rise of its own. In view of the strength underlying Canadian financial markets and the modest, unrevised consensus for tomorrow?s indicator, a number that is a wide margin beyond the market?s official expectations could stock another round of bullishness.
Bonds -10-Year Canadian Government Bonds
Canadian government bonds rallied Monday despite a surge in March housing permits. Before the actual release, the active futures contract on the benchmark 10-year bond was strategically positioned just above the 112.29 support level that has built up through a number of intraday swing lows. The range low held up to the fundamental surprise as traders discounted the indicator?s effect on the monetary policy. The permits indicator is susceptible to volatile swings, and it is furthermore considered a lower rung indicator for the housing sector. Therefore, participants in the bond market may reserve their ‘housing? play until tomorrow?s starts number. Should starts confirm today?s number, the push on growth and inflation could drive yields higher (bonds lower) on speculation of a rate hike.

The steep, tight downtrending channel USDCAD has held in for the past month may have finally hit a roadblock, as the pair has run into support at the 1.1050 level. The USDCAD could continue to hold these lows should housing starts meet or beat expectations of a gain to 215,000, especially as building permits - a leading indicator for the housing sector - surged today. In fact, the figure rose a record 27.4 percent, completely erasing last month?s losses. However, given the volatile nature of this particular indicator, it will be important to gauge other housing releases to determine its true strength. With 1.1000/50 remaining such strong support for USDCAD, there may be other options by which to trade Canadian dollar strength. EURCAD declines, for example, have dipped below the important 1.5080 level and show no signs of letting up as the pair currently trades near 1.4989. On the other hand, a disappointing housing starts figure could relieve some of the pressure on both USDCAD and EURCAD, as the fallout in both pairs appear a bit overextended. Nevertheless, with the odds greatly in favor of an optimistic release, Canadian dollar bulls could continue to rule the market tomorrow.

Equities - S&P/TSX Composite Index
Canadian stocks climbed to a record for the second consecutive day after Alcan Inc. became the target of the nation’s largest takeover. The company received an unsolicited $26.9 billion cash and stock takeover offer from Alcoa Inc., which is seeking to create the world’s largest aluminum producer as metal prices surge. Alcan surged 34 percent to C$90.57, accounting for more than half the S&P/TSX Composite?s gain, as the index climbed 0.7 percent to 13,865.51. Gold prices also sent Canadian equities higher, as a 0.1 percent rise in Comex gold to $690.40 an ounce sent Barrick Gold Corp., the world’s largest gold producer, 31 cents higher to $34.12.
Meanwhile, Home Capital Group Inc. added $2.12 to $38.23 after the company said net income in the first quarter rose to 61 cents a share from 41 cents a year earlier on record mortgage lending. These reports were in line with today?s record 27.4 percent jump in building permits - a leading indicator for housing - signaling a healthy, thriving sector and boding well for tomorrow?s release of Canadian housing starts. The figure is anticipated to edge up to 215,000, but given the strong permits result, there is some upside risk for the release. As a result, the S&P/TSX rally could continue to reach new highs should housing starts meet or beat estimates. On the other hand, a softer than expected result could weigh down shares related to mortgages or builders, and subsequently limit the index?s push to 14,000.00.