[B]JUL 31 Canadian Gross Domestic Product (MAY) (08:30 EST; 12:30 GMT)
[B]How Will The Markets React?[/B]
Canadian dollar markets may post particularly strong reactions to upcoming Gross Domestic Product data, as all asset classes stand near key technical levels ahead of the release. This is especially true for the US Dollar-Canadian Dollar exchange rate, as it shows nascent signs of a medium term turn higher. According to our technical analyst Jamie Saettele, we are seeing the first impulsive wave of a longer-term rally. See here for more.
From a fundamental standpoint, the recent run of bullish economic data has been unable to keep the Loonie bid against its US counterpart. The trend suggests that we will need to see an especially strong GDP figure to force a strong Canadian Dollar rally. Consensus forecasts call for a strong 0.4 percent economic growth in the month of May?leaving little room for upward surprises. This all implies that risks may be weighed towards the downside for the domestic currency ahead of the report. Much of our fundamental bias may nonetheless depend on the reaction out of Canadian fixed income markets, with the 10-year bond near significant technical levels at time of writing.
[B]Bonds - Canadian 10-Year Bond Futures[/B]
Bond futures have shown significant strength through the past two months, with the recent anti-carry shakeout leading the 10-year future to its highest since early May. This has of course led Canadian yields significantly lower through the same period, but such unrelenting declines have recently slowed on technical levels in the underlying asset. Whether or not this stabilization may hold will largely depend on tomorrow?s Gross Domestic Product figures and may make for an especially volatile post-news price movement. The Canadian dollar has clearly seen support on expectations of higher short-term interest rates through 2007, but such rate gains may amount to little if longer-dated yields lose their footing.
[B]Canadian 10-Year Bond Futures (Daily Chart)[/B]
[B]FX - USD/CAD[/B]
The Canadian dollar stands to lose if tomorrow?s Gross Domestic Product number does not come above lofty consensus forecasts at 0.4 percent growth. Speculation over the future of domestic interest rates will largely depend on forthcoming growth and inflation data, with current futures prices predicting at least 25 basis points in interest rate increases through year-end. We believe that the current levels of the Canadian dollar nonetheless reflect such expectations, and it will likely take further rate increases to justify keeping the Loonie near multi-decade highs against its US namesake. Recent spike-highs of 1.0759 stand as resistance on any disappointment in the GDP figure, while nearest significant support is seen at the 1.0523 mark.
[B]USD/CAD (Daily Chart)
[B]Equities - S&P Toronto Stock Exchange Composite Index[/B]
Canadian equity markets have seen significant tumbles through the past weeks of trade, off nearly 800 points off of the highs seen on July 19. A large portion of these drops are due to the recent flight to safety across global asset classes, but it is nonetheless clear that the S&P TSX Index saw substantial declines before the carry trade shakeout. Canadian stocks previously gave up ground on worries over the subprime lending market in the US and now rest near a fairly significant upward-sloping trendline. Remaining above said trend leaves the longer-term rally perfectly intact, with a 100-day moving average at 13,761 likewise serving as a plausible price floor. Yet disappointing GDP figures could just as easily spark a sell-off in the popular Canadian index. The S&P TSX has produced an impressive 17.61 percent year-to-date return in US dollar terms, but a sudden tumble could remove a key pillar of support for Loonie corporate shares.
[B]S&P Toronto Stock Exchange Composite Index (Daily Chart)