cross markets data reaction

Will GDP Stir Canadian Equities And The Loonie This Time Around?

Thursday, 29 March 2007 23:27:18 GMT  |  John Kicklighter and Terri Belkas, Currency Analysts

Gross Domestic Product (MoM) (JAN) (12:30 GMT; 08:30 EST)

Expected:                  0.2%

Previous:                   0.4%

How Will The Markets React?

Just hours ago, a modest change in the second revision of fourth quarter US GDP triggered a considerable yet short-lived rally for the greenback and American equities. Tomorrow, Canada’s monthly equivalent will test whether it has the same pull in its own financial markets. The world’s eighth largest economy is expected to have grown 0.2 percent in January, following a considerable 0.4 percent pace of expansion the month before. Given the available component data for the same period, the market consensus seems somewhat low. Possibly disrupting a trend that goes back for months, factory activity may relieve its burden on growth – and perhaps even contribute to a positive read. Among the factory related reports for January, only manufacturing shipments printed a weaker number. More than making up for this wayward report though, the Ivey activity gauge hit a seven-month high while the trade account marked it widest surplus in over a year. Cross board demand was stoked by a considerable 9 cent drop in the Canadian currency’s exchange rate with the US dollar. Domestically, consumers seem to have played their part. Residential investment picked up in the opening month of the year with the annual pace of housing starts accelerating to 248,500 units, the fastest pace of development since August of 2004. Alternatively, consumer spending, the long-time rudder for growth, is up in the air. Retail sales slipped 0.2 percent in January, though a modest contraction was expected after the biggest jump in sales since 1997. Furthermore, the strong labor trend plowed ahead for the same period with an 88,900-person addition to national payrolls that was more than seven times economists’ estimates. Whether the report hits the wires above, below or in line with the consensus, it will likely be the extent of the surprise that generates movement. In March, the fourth quarter data could only muster muted reactions across the asset classes; and the coming report is only for the month.

Bonds – Canadian 10 Year Government Bond Futures

Canadian government debt has formed a stable support in the past few days. For the 10-year futures contract, support is seen at 113.20 which was put in place by a double touch low. At the same, as the base forms, daily ranges have also contracted – perhaps setting the market up for a breakout move with the right economic trigger. Friday’s January GDP report may be just the report to elicit such a dramatic move from the government debt crowd. According to the official consensus floating in the market before the report, traders were pricing in a modest pull back from December’s hot number to a 0.2 percent print the following month. However, it may take a considerable jump or drop in the report to actually shift the BoC off of its neutral policy stance; and in turn drive bonds.





FX – USD/CAD

Not surprisingly, USDCAD has hit another patch of frustrating congestion near major support at the confluence of the 38.2 percent fib of 1.1029 - 1.1877 and a multi-month trendline near 1.1550. Price action has become even more confusing as the Canadian dollar’s movements have diverged from that of crude oil, which continues to rally amidst tensions between Iran and the West. Fortunately for traders, muted USDCAD action usually precedes breakouts for the pair, and Canadian GDP for the month of January could be the spark to get Loonie going. Expansion is anticipated to slow to 0.2 percent from December’s one year high of 0.4 percent as consumer spending growth remains tepid despite a consistently tightening labor market. Furthermore, the release will come just a few weeks after fourth quarter GDP eased to 1.4 percent - the weakest pace in more than three years – which Bank of Canada Governor David Dodge attributed to a strong currency and weaker US demand. Should Canadian growth prove to weaken in line with estimates, markets may foresee a softer stance by the Bank of Canada, sending USDCAD towards the 100 day SMA at 1.1633. On the other hand, the report  could hit the tape above expectations, as recent economic indicators have reflected resilience in the housing and manufacturing sectors while retail sales (excluding autos) improved. Such a surprise would raise prospects for the BoC to keep a steady hand in regard to interest rates, which could leave USDCAD barreling through support towards 1.1550.





Equities – S&P/TSX Composite Index

A run up of share prices on Wall Street on the back of stronger-than-expected fourth quarter GDP helped push Canada’s S&P/TSX Composite Index up 0.5 percent to 13,258.02 today. Rising oil prices also boosted the index, as Iran’s delay in releasing British sailor Faye Turney sent crude up above $66/bbl to close at a six month high. Shares of BCE, Canada's biggest phone company, pulled back from an initial advance of 11 percent after Bell Canada's parent responded to rumors of a possible takeover by New York buyout firm Kohlberg Kravis Roberts by saying there are "no ongoing discussions." Nevertheless, BCE ended the day up 6.4 percent at C$32.05.

Canadian shares could be weighed down slightly on Friday upon the release of GDP January. Expansion is anticipated to slow to 0.2 percent from December’s one year high of 0.4 percent as consumer spending growth remains tepid despite a consistently tightening labor market. Furthermore, the release will come just a few weeks after fourth quarter GDP eased to 1.4 percent - the weakest pace in more than three years – which Bank of Canada Governor David Dodge attributed to a strong currency and weaker US demand. On the other hand, the report could hit the tape above expectations, as recent economic indicators have reflected resilience in the housing and manufacturing sectors while retail sales (excluding autos) improved. If expansion actually accelerates, the S&P/TSX could ascend once again towards the February high of 13,433.01.

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