Canada and Australia continue to surprise with notable improvements in their labour markets

As long as US lawmakers stand against China’s joint venture plans (steel, oil and gas), the flow billions of Chinese investments are due to reach Canadian oil and gas properties in coming years

S&P500 awaits Q2 earnings

London – 12th July 2010

Canada and Australia continue to surprise with notable improvements in their labour markets. Friday’s stellar 93K increase in Canada’s June employment was the second biggest on record. Unemployment unexpectedly hit a 14-month low of 7.9% from 8.1%. In Australia, June unemployment fell to 5.1% to reach 15-month lows, while payrolls adding 46K, the 4th consecutive month in positive territory. The main difference between the RBA and BoC is that the former remains at the nascent stage of normalizing its tightening policy (raised rates by only 25 bps from the 0.5% low) while the RBA raised rates by 150-bps from the 3.0% low of the crisis.

CAD continues to outperform AUD on relative interest rate basis and policy-favourable environment. Not only does risk aversion weigh on higher yielding currencies relative to lower yielding ones, but this would be especially the case as the RBA faces a 40% chance of an interest rate decreas eby year-end. In contrast, Canadian policy rates face ample upside growth as they remain near their historic lows. CAD also has the upper hand from a foreign investment standpoint.

As long as US lawmakers stand against China’s joint venture plans (steel, oil and gas), the flow billions of Chinese investments are due to reach Canadian oil and gas properties in coming years.

USDCAD eyes 1.0270 after repeatedly failing the 1.0680 key resistance, while AUDUSD struggles to regain 0.90. AUDCAD stands vulnerable to retest 0.8870. AUD and gold watchers must pay attention to the EUR flows, which continue to dictate GOLD/EUR activity and consequently the GOLD/USD. What may appear to be a “unstressful” series stress tests for European banks could further erode GOLD/EUR longs and the rest of the long positions at the expense of AUD.

S&P500 awaits Q2 earnings with the backdrop of the highest quarterly increase in the value of the US dollar (+6%) since Q3 2008 as well as a more adverse environment for bank trading revenues. Compounding the magnitude of USD strength since Q4 2009, US multinationals would have dealt with a +10% increase in the currency. While we heard much talk about the bearish implications of the dead cross (50-day MA faling below 200-day MA), such a pattern does not carry the same extent of bearishness as the 50-day MA falling below the 100-day MA, while both standing above the 200-day MA. At any rate. Chartists closely watching the immediate resistance of 1,091 (38% retracement of the decline from the 1220 high to the 1012 low), a break of which will shift attention to the 200-day MA, currently at 1111. A failure to call up 1090 would spell out a “lower highs” pattern, whose implications suggest prelim 1040.

Ashraf Laidi

CMC Markets Chief Market Strategist