Canadian Dollar Trades on Oil Prices, Ignores Housing Data

How Did The Markets React? 

Given several days of continued weakness, the Canadian dollar posted a relatively muted reaction to today’s housing market data. This relative indifference was also seen in other asset classes, with Canadian bonds staying relatively flat on the close, while equities likewise ignored the economic release. With headline Canadian Housing starts near yearly lows, markets seemed little concerned over the health of the Canadian economy. This is perhaps unsurprising, however, with Friday’s employment data providing a boost to forecasts of Domestic growth. Indeed, bond yields remain near 2-week highs, as the Canadian economy awaits upcoming fundamental news releases. Due tomorrow morning at 13:30 GMT (08:30 EDT), government officials will report on the levels of the International Merchandise Trade balance for the month of November. Given Canada’s significant dependence on international trade, the event could provide some risks to all domestic asset classes. Otherwise, Loonie markets will look to later EIA Crude Oil Stocks figures at 15:30 GMT (10:30 EDT), with any fluctuations in the price of oil to weigh on the domestic currency and equity markets. 
 
Bonds – Canadian 10-Year Note

Bond markets were perhaps those most affected by the morning’s data, with Futures on the 10-year note adding as many as 20 small points through 15:00 GMT. This rally was short-lived, however, with an overall bearish trading atmosphere leaving risks to the downside for domestic debt markets. Traders were relatively unnerved by the bearish economic data, instead leaving Friday’s downward momentum intact, with Futures making lower highs through the North American close. In fact, it will likely take a worse than expected result in upcoming economic news to allow the Canadian 10-year a noteworthy relief rally. With a triple-top for prices at the 114.20 mark, risks seem pegged to the upside for the future of Canadian bond yields—with the domestic currency to benefit from higher rates of return for domestic debt.

FX – USDCAD

Though the reaction was rather conservative, the Canadian dollar did see an immediate response to today’s housing numbers. Taken into historical context in fact, the run following the report pushed the USDCAD pair to an 11-month high. The first of three due over the next few days, the construction figures put the group of data on poor footing. Ground breakings marked a three-month low 211,500 units on an annual basis to fall short of the 220,000 unit pace initial predicted for the period. While it is generally believed that construction of over 200,000 units is a strong pace for the economy the slide in starts through the year holds broader implications. As housing activity falters, consumer spending is likely to follow. This in turn will knock one of the final pillars out from underneath the economy while at the same time relieving inflation pressures – exactly the one-two combination needed for board members at the Bank of Canada to finally discuss a rate cut. Aside from the event risk surrounding the housing report, the underlying current in Canadian pairs was swept along once again by energy prices. As time-zones wore on, a sharp drop in Brent crude oil encouraged a further slide in the West Texas Intermediate (the standard grade in the US). The deterioration in price of one of Canada’s biggest exports kept the USDCAD sliding closer and closer to 1.18. However, a tag of the psychological level was not in the cards today. Stopping short of the key figure, a turn in crude through the afternoon hours of trade on the NYMEX led currency traders to bid the loonie on speculation the bottom has been found in the natural resource. Now a number of factors will work on this pair: crude; a trade and housing price indicator from Canada; and a trade report from the US.  In the absence of economic surprises, the oil correlation will likely hold.

Equities – S&P/Toronto Stock Exchange 60 Index

Canadian equities started the session with a sizable gap. The S&P/TSX 60 Index opened Tuesday’s session nearly one-and-half points below yesterday’s close. Prior to the open of capital markets in Toronto, pressure was building behind the currency as international markets hammered energy prices lower. Continuing a marked slide in the necessary good’s price last Wednesday in the New York session, selling wrapped around the globe once again to the US. However, intra-day trading in the commodity market has some speculators calling today’s $55.82 intra-day low, the floor in the recent swing. This would be a strong turn of events for the nation’s benchmark stock indices which typically have heavy weightings in energy and raw material producers. Over in the S&P/TSX Composite, the retracement in oil’s losses was not substantial enough to put off a 1.5 percent decline in its energy group. A number of factors are playing into predictions of a turn in crude and subsequent pick up in equities. OPEC’s additional 500,000 barrel per day cut in production will take effect February 1st to play on supply. For demand, a cold snap across the Northeastern region of the United States promises to put bidding pressure under crude as well. Finally, rumors are circulating that big hedge funds are adding much of the selling pressure to this recent move as a few big players and trading programs are forced to liquidate into stop loses.  When all the positions have been unwound, a rebound could be easily achieved – if the weather cooperates.