Canada's PMI Surprises Lower, Contraction Continues

The Ivey Purchasing Managers Index fell from 45.2 to 43.2; economists surveyed by Bloomberg had expected the measure to rise to 47.0. The move lower follows a sharp rise in the index which bottomed at 36.1 in January. The measure of expansion has now declined for the past five months as the economy suffers through its first recession since the early 1990s. Exposure from abroad remains a top concern as contraction in the US, Canada’s largest trading partner, weighs heavily on the nation. Slowdown in credit markets and demand destruction in commodities have also had a dire effect on the domestic economy as housing starts continue to tumble and unemployment rose to 7.7% in February from 7.2% in the previous month. Canada’s recovery will ultimately be tied to that of its southern neighbor, but it is clear that the downturn will not be nearly as severe if the US economy grows in the latter half of the year and into 2010. Early signs in the survey may also show hint at possible recovery in the months ahead. The Inventory measure of the Ivey report rose from 40.2 to 50.8, the first expansion since October. As demand fell, manufacturers have cut back on production and trimmed payrolls. The first rise in six months signals that months of steep job cuts meant to reduce inventories and capacity utilization may be ending.

The Canadian dollar is weaker this morning, with the USDCAD moving over 100 pips higher in the past few hours to 1.2390. The US Dollar fell significantly in the previous week as risk appetite increased and demand for the safe-haven currency fell.

High Yielders Continue to Win Out on Improved Sentiment (Morning Slices)

MORNING SLICES

Fundys – There were no significant developments overnight, with the market continuing to trade off of the broader global macro fundamentals of improved sentiment and increased risk appetite. The more upbeat psychology has resulted in additional buying of higher yielding currencies, with traders once again focused on favorable interest rate differentials. The New Zealand Dollar has been a star performer of late as a result, and once again leads all currencies on the day, up some 1.50%. The Australian Dollar has however been somewhat of a laggard, with the antipodean weighed down on fears of a potential rate cut at Tuesday’s meeting. Calls from AFR Mitchell for a 50bp cut on Tuesday, have been sourced as a primary driver for the relative weakness in Aussie. The Swissy has also been a relative underperformer on the crosses with Friday’s much lower than expected inflation data escalating fears over the threat of deflation. ECB Bini Smaghi was on the wires overnight touting the Euro as “the best exchange rate decision Europe has ever taken.” Meanwhile ECB’s Quaden and Bonello made it quite clear that the central bank was not yet done with accommodation and would consider all options going forward. In Japan, traders began to focus on the expected unveiling of the new stimulus package. The government is now expected to approve another USD100B on top of the USD119B already in circulation. Usd/Jpy has been very strong on the day with the market bolstered on heavy cross related yen offers. On the data front, Eurozone investor confidence was better than expected while annualized PPI data came in much softer to put in the biggest drop since April, 1999. Eurozone retail sales was also concerning after the data series showed a much weaker than expected annualized print. Looking ahead to the North American session key event risk comes in the form of Canada building permits (-3.0% expected) and Ivey PMI (45.4 expected) due at 12:30GMT and 14:00GMT respectively. On the official circuit, Fed Warsh is slated to speak at 17:00GMT on the financial markets in Washington.

Techs - EUR/USD continues to extend gains into Monday with the market now focusing on the 78.6% fib retrace off of the 1.3740-1.3115 move by 1.3600. A break above the 78.6% fib should open a direct retest of 1.3740 while back below 1.3365 will put the pressure back on the downside. USD/JPY (See below). GBP/USD gains have stalled out just shy of the key 1.4990 early February highs. Look for this level to be tested and broken over the coming session with only a break back below 1.4650 to delay the short-term bullish price action. Ultimately any gains are not seen extending much beyond 1.5070 on Monday. USD/CHF dips have found some support intraday by the 200-Day SMA which continues to prop the major on dips. The market has been unable to establish a close below the 200-Day, and we would expect the moving average to once again support. Ultimately only below 1.1165 will shift outlook. A break back above 1.1395 is now required to accelerate to the upside.

Flows – Semi-officials on the offer in Euro. Asian accounts and tech related sell interest in Aussie above 0.7200; option expiries at 0.7150. Hedge fund buying Cable; US investment house and French bank selling. Japanese investment names on the bid in Usd/Jpy; commercial accounts selling.

Trade of the Day – Usd/Jpy: The pair is looking stretched intraday with the market having already exceeded its daily “average true range” (ATR) of 175 pips, to trade up well over 200 pips thus far. While we see scope for additional upside over the coming days, with shorter-term studies so stretched, we look for an opportunity to establish a playable counter-trend short on Monday if given the chance. The next key level to watch above comes in by 101.70 which represents the 61.8% fib retrace off of the major 110.70-87.15 move (Aug08-Jan09). As such we will sell on a rally to 101.70 today in anticipation of a major corrective pullback from there. Strategy: SELL @101.70 FOR A 99.35 OBJECTIVE, STOP @102.70. Stops to be trailed to cost on a break back below 101.20. If trade triggers and 101.20 not broken, position to be closed out at NY close (5pm ET) on Monday. Recommendation to be removed if not triggered by NY close on Monday.

U.K. Nationwide House Prices Rise for the First Time in 17 Months

U.K. Nationwide house prices rose by 0.9% m/m in March, while we had looked for a 1.4% m/m drop and the Reuters median was for a 1.5% m/m fall and compared to a 1.9% m/m decline in February. This is the first monthly increase to the Nationwide index since October 2007 but the mortgage lender stressed that it was too early to talk about a housing market recovery. The y/y rate improved to -15.7% from -17.6% in February. Indeed, although we have seen some encouraging signs recently of stabilized mortgage lending, the expected sharp unemployment increase this year and next is likely to continue to place downward pressure on house prices.