Canadian Housing Starts (MoM)(SEP) (12:15 GMT, 08:15 EST)
How Will The Markets React?
Canadian housing starts are likely to show that the domestic real estate market continues to grow at a healthy pace through September, defying credit market duress and subprime lending problems in the US economy. The barometer for new real estate growth showed a sharp rebound from an unexpected drop in July-signaling that demand for housing will likely continue through the medium term. Booming global commodity markets continue to show their positive effects on the Canadian consumer, driving unemployment rates to 33-year lows and forcing new housing construction in resource-rich provinces. Given overwhelmingly bullish employment data through last week's trade, these trends show very few signs of slowing. In fact, if we see continuation in both labor and housing market trends, speculators will likely expect higher Canadian interest rates through year-end.
Bonds - Canadian 2-Year Bond Yields
Expectations for the future of Canadian growth are easily seen in domestic bond yields, with last week's employment gains forcing a substantial rally in shorter-dated debt yields. The 2-year Canadian Government Bond yield has now run up to technical resistance at a falling trendline and 200-day moving average, but a sustained break higher could easily signal a bullish outlook for the North American economy. Such price movements are likewise visible on shorter-dated interest rates, as markets now expect the Bank of Canada to leave interest rates unchanged through year-end. This stands in contrast to previous forecasts of falling Canadian yields in 2007 and has been one of the driving forces behind the Canadian dollar's run to 31-year heights against its US namesake. A further breakout in yields could only continue to help the loonie, as 2-year Canadian Government Bonds already boast a 30bp yield advantage over 2-Year US Treasury Notes.
FX - USD/CAD
The Canadian dollar has recently catapulted to 31-year heights against its US namesake, with the USDCAD showing very few signs of slowing its decline. Traders calling for a bottom in the USDCAD have been frustrated at the apparent lack of clear support levels for the greenback. Part of the difficulty in determining potential turning points on the currency pair is the fact that one has to go back over three decades to see historical precedents on a price chart. That being said, a monthly chart shows that the last worthwhile spike-low on the pair occurred at the 0.9660 mark, where the US dollar showed a double-bottom and went on to rally significantly in the next several years of trade. If economic data for the Canadian economy continues to impress, we could potentially see the USDCAD test this historic support line before showing clearer hope for reversal.
Equities - S&P TSX Index
The S&P TSX has shown a similarly optimistic outlook for Canadian economic growth, as the index mounts a test of significant technical resistance through recent trade. Friday's close shows above the previous market double-top is undoubtedly a bullish sign for the broader stock market, and a sustained move above eyes a test of all-time highs at 14,646.82. We subsequently look forward to tomorrow's housing data and later economic reports to gauge whether such strong upward extension is likely. As it stands, the buoyant Canadian equity market only adds further support to the domestic currency.