Canadian Dollar, Equities And Bonds Bank On Housing Data For Action

How Will The Markets React?
Canadian markets have seen strong moves across the board over the past few days even though there was hardly the impetus from the economic calendar to support such a wide-spread bid. This sets traders up with the potential for a very volatility day tomorrow, when the first indicator since Thursday’s employment numbers hit the wires. According to the economist consensus, the annual pace of housing starts is expected to accelerate to 215,000 units in March from 196,200 the month before. Considering the statistics for the housing gauge so far this year, the official outlook for tomorrow’s number is comparatively reserved. Putting the numbers into perspective, the dip in February brought the gauge to its lowest level in nearly three years. Conversely, construction activity surged to a 248,500-unit pace the month before – the most groundbreakings since August of 2004. This heightened volatility was the product of unusual weather which provided an unseasonably warm January and a bitterly cold and damp February. With temperatures stabilizing somewhat in March, it doesn’t seem as if Mother Nature will be the driving factor in the housing market for another month. Instead, speculators will need to garner their evidence from the few related indicators available to them. This is a short-list. Perhaps the only report with a close enough link to housing starts is February building permits, which actually marked the biggest drop in approvals in over a year in a 22.4 percent drop. Alternatively, strong employment and confidence surveys may help push construction activity through the permits slump. Regardless of the outcome, market participants will jump on the release to help guide speculation of whether the Bank of Canada will pursue a hike in the near future. In the past few weeks, headline and core inflation have rebounded while employment threatens to stoke consumer spending. A strong bounce in housing would only confirm the emerging hawkish bias.

Bonds – 10-Year Canadian Government Bond Futures
Canadian yields have pushed ahead since the middle of March as economic data has roused bygone rate watchers from the sidelines. The true start to this bid began on March 20th when the consumer price index figures printed higher than the market had expected. Over the month of February, headline inflation pressures grew 0.7 percent while the annual figure accelerated to 2.0 percent. Furthermore, the jump in the core number to 2.4 percent from 2.1 percent the month before confirmed pressures were building beyond the energy complex. Surely provoking the BoC’s attention, the employment data from Thursday only raised the stakes for an eventual hike. Now, housing data is looking to fit as another piece of the puzzle. If the numbers beat expectations, hawks may get serious.

FX – USD/CAD
The Canadian dollar has strengthened significantly against the US dollar over the past two months after hitting a high of 1.1876 in early February. However, the USDCAD pair has run into Fibonacci support at 1.1455 as well as the 200 SMA at 1.1448, limiting additional gains for Loonie. USDCAD may have the opportunity to make a sharp break lower on the release of Canadian housing starts, which are anticipated to rebound to 213,500, boding well for the housing sector as a whole since demand remains robust and will likely push prices even hire. As a result, a strong starts reading will also bring about positive sentiment for consumer spending, since many households gauge their spending on the value of their properties. Nevertheless, with the Canadian dollar becoming more and more expensive, the export sector will start to suffer and slow the manufacturing industry, which has served as the linchpin of Canadian economic growth for years. Until consumers in the country pick up the slack by increasing domestic demand, expansion as a whole could be in trouble.

Equities – S&P/TSX Composite Index
Canadian stocks fell from a record of 13,519.09, led by financial shares on speculation that the Bank of Canada may raise borrowing costs to cool inflation. The S&P/TSX Composite Index fell 0.4 percent to 13,431.30 as Manulife Financial, Canada's biggest insurer, fell 75 cents to C$40.08 while Royal Bank of Canada, the nation's largest bank, dropped 80 cents to C$58.12. On the other hand, phone company shares gained after BCE Inc.'s largest shareholder said it is considering its options after tripling its stake in Canada's largest phone company in the past two years. BCE shares have been rising this month on speculation an investor may buy out the company and gained 4.9 percent alone today to C$34.23.

Will Canadian equities return to their previous highs? Additional gains for the S&P/TSX are contingent upon two factors: First, the direction of global equities could influence the Canadian index, which tends to follow broader moves on Wall St. Secondly, the release of Canadian housing starts may lead shares through resistance as the figure is anticipated to rebound to 213,500 – boding well for not only the housing sector, but for consumer spending as well.