Canadian Dollar, Equities Traders Eye Tentative Crude Retracement

How Did The Markets React? 

Over the past four active trading sessions, the Canadian financial markets have been jostled by a number of fundamental events. However, underlying the few economic releases and carry differential speculation overriding action in government debt and the currency, crude oil has marked a volatile swing lower. A broad commodity drop began in earnest on January 3rd, with gold falling 5.6 percent, copper slipping 9.3 percent, and crude plunging 10 percent to their respective lows. Particularly dear to the Canadian economy, oil prices began their own decent on Wednesday on surprising weather forecasts and a 2 million barrel rise in distillate inventories. Already experiencing the warmest winter weather in years, meteorologists were further predicting weekend temperatures of up to 70 degrees in the Northeastern US, which accounts for 80 percent of the countries heating demands. The pervasive response was easily seen in price action that played out in Canadian equities and the national currency. Recently, however, the tables have turned. After coming within cents of a one-and-a-half year low, crude has begun to pick up on an Eastern-board cold front, speculation of another emergency OPEC meeting and rumors of an imminent attack by Israel on Iran’s nuclear facilities. Now that the fundamentals are beginning to support oil and the US economic quiets down, the crude correlation may once again support Canadian assets.
 
Bonds – Canadian 10-Year Note

Since the commodity markets have been put into motion, the debt markets have been the least effected. Initially, the instrument provided the correct response to commodity movements. From a low around 99.60 around the open of active trading in Canada Wednesday morning, to a 100.03 high through Friday, the draw on export revenue guided the benchmark asset. This correlation was thrown off, however, when Canadian and US employment numbers hit the wires. Canadian payrolls grew four-times expectations to add 61,600 jobs to the economy. Proving a demand booster, US NFPs had also bested expectations were their own 167,000 print. When these numbers ran across the ticker, investors scrambled to correct predications of a rate cut sometime this year. Pushing ahead to Monday’s session, when employment numbers passed and energy prices began to rebound, the rise in yields (and subsequent fall in price) continued. When all is said and done though, crude oil’s influence over debt will have difficulty guiding government debt as a number of housing indicators and a trade report put the market in motion.




FX – USDCAD

Canada’s economic calendar over the past week was well suited to the loonie/crude correlation. With an empty first half of the week freeing traders to the guidance of crude prices, the Canadian dollar began to slip against its more liquid counterparts. In the USDCAD pairing, energy movements took the reins when the EIA reported inventory data in the US. At 15:00 GMT, USDCAD began what would turn into a 100-point advance. Even when the employment numbers were printed, the reaction was only temporary. Statistics Canada reported a 61,600 jump in employment, sending the nation’s jobless rate to a 6.1 percent to match a 31-year low. However, the strong implications for the Canadian currency were almost immediately neutralized by an equally impressive turn for US employment, which printed only an hour-and-a-half after its Canadian equivalent. Now, as the new week starts and crude prices initiate a promising rebound, the Canadian currency looks to do the same across the board. Oversold conditions against the Japanese yen, US dollar and euro now set the unit up for further strength in crude prices. Looking ahead, currency traders will monitor rumors of a possible Israel attack on the Iranian nuclear plant, the chilly turn in the weather in the US and Wednesday’s EIA inventory numbers to see weather the strength of a potential retracement will be able to supersede the planned economic releases due over the next few days.




Equities – S&P/TSX Composite Index

Equities have shown the most clearly defined correlation to weakening energy prices last week. Over the period, the benchmark S&P/TSX Composite slipped 3.3 percent. The ailment caused by energy and other commodities was more easily pinpointed. Energy and Material producer sectors, which account for nearly 40 percent of the Composite index, each contracted 6 percent last week. Already, Monday could signal a new direction for the necessary commodity and subsequent stock index. As crude prices looked to plug their worst weekly performance since April of 2005, the S&P/TSX Composite put in for a modest 0.6 percent advance to 12,553.09. For the energy sector, a 1.1 percent advance formed. Taking a more intimate look into the industry group, shares of Canadian oil giant Encana climbed C$0.76 to C$53.35 while those of natural gas firm Suncor Energy marked a C$0.78 pick up to C$85.87. Going forward, as weather and geopolitical factors evolve, the influence on the stock market should prove strong. The only hurdle to a commodity prices directing shares will be a few pieces of macro economic data (namely housing starts, new home prices and the international trade account). However, as projections of economic growth remain staid and interest rate shifts look a to be a long-ways off, the heavily-weighted energy sector should take the lead for the S&P/TSX Composite.