Canadian Dollar to Advance on Risk Appetite, Rates Outlook

Although stock exchanges were closed for the Good Friday holiday, futures on the benchmark S&P 500 stock index advanced 0.3 percent to a new yearly high after the Department of Labor reported that the US economy added 162,000 jobs in March – the most in three years – while the previous month’s result was upgraded to show that just 14,000 were lost in February, a vast improvement over the originally reported 36,000 decline. Markets both in the States and around the world have yet to price in the outcome in earnest, opening the door for a strong start to the upcoming trading week. This bodes well for the Canadian Dollar as the currency remains closely linked with underlying trends in risk appetite. Indeed, the 20-day percent change correlation between a trade-weighted index tracking the Loonie’s value against its top counterparts and the MSCI World Stock Index yields potent reading of 0.75.

Meanwhile, Canada’s own employment figures are set to show that the economy added 25,000 jobs in March, marking the third consecutive month of job growth and the first such streak since the first quarter of 2008. The Ivey Purchasing Managers Index is expected to rise to 55.0 in March, showing the manufacturing sector expanded at the fastest pace in four months. The US employment outcome also promises outsized gains for the Canadian economy beyond the boost to overall risk sentiment. A recovery in the US labor market points to rising disposable incomes and increased overall consumption, all of which is good news for Canadian export firms that count on the States to absorb close to 80 percent their cross-border demand. On balance, all of this translates into higher interest rate expectations, a natural source of the strength for the exchange rate. Indeed, a Credit Suisse gauge of priced-in rate hike expectations now calls for 160 basis points in tightening over the next 12 months, the highest reading in at least three years.