With a sparse economic calendar for North America yesterday, equity investors found no impetus to ease the slide in stocks witnessed on Friday, instead choosing to continue offloading exposure as momentum stocks endured another dreadful trading day.  Risk appetite was sparse throughout financial markets, with the S&P shedding another 1.08%, while the Japanese yen strengthened to send USDJPY to test the 103 handle before breaking lower during the overnight Asian session.  Short-term protection was well bid throughout yesterday’s session, although the heavy buying of the cash VIX contract to push the fear index to 15.5% and invert the curve on the near end suggests the bid tone was more a function of the slippage in equities rather than broader event risk.
After a botched attempt to regain the 1.10 handle early in the morning, USDCAD spent the remainder of the session range bound in the high-1.09s, with the Bank of Canada Business Outlook Survey failing to move the needle in term of demand for the Loonie. Â The first quarter survey of business conditions showed that most companies expected to see a boost in sales as the recovery in the US took hold, however they envisioned having a hard time passing on increasing import prices from a weakening Canadian dollar to their end customers due to heavy competition in the retail space, both domestically and from US macro stores. Â The potential for thinning margins until a pick-up in demand can chew away at some of the excess slack in the economy held the Loonie in check from getting too carried away, although the technical positioning still remains positive as USDCAD remains below 1.10.
Elsewhere in the Great White North, the possibility for a referendum in the province of Quebec was ousted for the time being last night, as the Quebec Liberal Party trounced the Parti Quebecois and regained a majority government under Phillppe Couillard.  The early election call from the PQs ended up backfiring on the party, with the Liberals able to capitalize on referendum and cultural gaffes committed by the PQs, rolling to an easy victory over the separatist party.  The Loonie was largely unaffected in early Asian trade, as the chance of a new referendum had been downplayed over the last few weeks as it had become clear the PQ’s were losing traction on the separatist views.
The overnight Asian session picked up right where Wall Street left off, as disappointment with the lack of fresh stimulus being applied from major central banks in the East had traders and investors hitting the sell button.  Commentary from one of China’s biggest news agencies played down the prospects of a large stimulus type package like the one after the 2008 financial crisis, instead noting that after a string of mediocre economic indicators, the smaller, more directed fiscal stimulus measures would most likely be how the government proceeds.  While this doesn’t materially alter our view on the PBoC’s stance towards monetary policy, the downplaying of a large stimulus package hasn’t pleased equities.
Similarly, the Bank of Japan decided to maintain the status quo and not expand their asset purchase program at the conclusion of their two-day policy meeting overnight.  The BoJ stated that the economy continued to recover moderately, although there had been some fluctuations due to the recent consumption tax hike.  While we hadn’t expected further action from the BoJ until the end of Q2, the willingness to chalk up some of the more worrisome economic indicators in Japan as being transitory makes us caution the timing of the BoJ’s next increase to their QE program, with the end of Q2 potentially being early.  The inaction from the BoJ kept pressure on USDJPY throughout the overnight session and into the North American cross, sending the pair into the low 102s, while the Nikkei lost 1.36%, and the DXY was crushed south of the 80 handle.
Turning our attention to North America, equity futures are pivoting around unchanged before the opening bell, trying to claw their way out of the hole dug by the collapse of USDJPY carry trade.  The commodity complex is finding some popularity this morning as the DXY licks its wounds, with Gold popping back above $1,300/ounce, while front-month WTI trades north of $101/barrel.  Although the Loonie is under performing when compared to other majors like the JPY, NZD, and GBP, it manged to ride along on the coattails of the USD’s overnight slump, pushing USDCAD into the low 1.09s.  Some of the CAD’s early morning strength was clipped after housing starts for the month of March came in at a seasonally adjusted annualized rate of 157k, missing the median analyst estimate of 191k.  Not helping matters for the Loonie, USDCAD on a m/o/m basis, a much sharper fall than the 2.7% drop that was expected.  This mornings data is likely to confirm the housing market in Canada will stabilize over the coming months, although the worry will now be whether there has been enough re-balancing towards exports and business investment to pick-up the slack where consumer activity could fall short if housing cools off; again another reason to question the legs of the recent CAD rally.
Looking ahead to the remainder of the session, the Job Openings and Labor Turnover Summary (JOLTS) for the American economy during the month of February is due out at10:00EST.  The employment situation in the states appeared to have been on slightly firmer ground than originally anticipated in February as last Friday’s jobs numbers saw upward revisions to the original report in February, bringing the amount of new jobs created to 197k.  The number of job openings is an important leading indicator for the economy, as companies will begin to look for new hires in anticipation of increased demand, and therefore an increasing number is a good sign.  That being said, the American job market has struggled to crack the 4M mark on a sustained basis since early 2008, so this will be a key level to watch in the coming months, especially as the Fed looks to alternate labour market indicators in addition to the unemployment rate when crafting policy.
Further reading:
JOLTS
USDCAD
