trading news reports

USD/CAD: Trading the Canadian Retail Sales Report

Private spending in Canada is expected to improve for the second consecutive month in September, with economists forecasting retail sales to increase 0.6% from the previous month, and the data is likely to encourage an improved outlook for the region as policy makers see the economy emerging from the recession in the third quarter.

Trading the News: Canadian Retail Sales

What’s Expected
Time of release:        11/23/2009 13:30 GMT, 08:30 EST
Primary Pair Impact :    USDCAD
Expected:         0.6%
Previous:         0.8%

Effect the Canadian Retail Sales has had on USDCAD for the past 2 months

August 2009 Canada Retail Sales

Household spending in Canada surged 0.8% in August to top expectations for a 0.4% rise, and the data reinforces an improved outlook for the region as policy makers see the economy emerging from the recession in the third quarter. A deeper look at the report showed automotive sales jumped 2.4% after contracting 00.8% in July, with gasoline receipts increasing 3.9% to lead the advance, while discretionary spending on food and beverages tipped 0.1% higher after falling 1.4% in the previous month. Meanwhile, the Bank of Canada held an improved outlook for future growth and said that an economic recovery is under way as the expansion in monetary and fiscal policy shores up the ailing economy, but pledged to keep borrowing costs at the record low going into the following year to encourage a sustainable recovery.

July 2009 Canada Retail Sales

Retail sales in Canada slipped 0.6% in July amid expectations for a 0.7% rise, and conditions may get worse throughout the second half of the year as households face a weakening labor market. The breakdown of the report showed auto demands fell 1.0%, with gasoline receipts tumbling 3.4% to lead the decline, while discretionary spending on food and beverages slipped 1.5% after rising 0.9% in the previous month. As the economic outlook remains uncertain, the Bank of Canada pledged to hold the benchmark interest rate at 0.25% throughout the first half of 2010 in order to foster a sustainable recovery, and policy makers may continue to hold a dovish outlook for inflation as growth prospects remain weak. As the BoC sees a risk for a protracted recovery, the board may verbally intervene in the currency market as the appreciation in the exchange rate weigh on the economy.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to go long the USD against the Canadian dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.

Bearish Scenario:  If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the USD against the Canadian dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.

How To Trade This Event Risk

Private spending in Canada is expected to improve for the second consecutive month in September, with economists forecasting retail sales to increase 0.6% from the previous month, and the data is likely to encourage an improved outlook for the region as policy makers see the economy emerging from the recession in the third quarter. However, the monthly GDP reading showed economic activity unexpectedly contracted 0.1% in August after holding flat during the previous month, led by a 2.3% decline in energy outputs, and businesses may continue to scale back on production and employment throughout the remainder of the year in an effort to weather the downturn in global trade. A report by Statistics Canada showed the economy unexpectedly shed 43.2K jobs in October, with the annual rate of unemployment rising to 8.6% from 8.4% in the previous month, while wholesale demands increase 0.2% in September amid expectations for a 1.0% rise, and households may look to ramp up their rate of savings going forward as policy makers see a risk for a protracted recovery. Nevertheless, the Bank of Canada held an improved outlook for the world’s eighth largest economy and said that a recovery is “under way,” and went onto say that  the risks to the economy are “roughly balanced.” However, the central bank warned that the marked appreciation in the exchange could “more than fully offset” the recent rebound in economic activity, and argued that the board retains “considerable flexibility” in its management of monetary policy as the board anticipate inflation to hold below the 2% target until the third quarter of 2011. Moreover, BoC Governor Mark Carney said that the central bank has “options” to temper the appreciation in the exchange rate during a speech in front of the Senate banking committee, which includes quantitative and credit easing, and noted that the “slack” in the economy is likely to keep price pressures subdued throughout the following year. In addition, Mr. Carney said that 3Q GDP is likely to be softer than projected during a speech in New York and maintained his pledge to keep borrowing costs at the record low going into the following year to encourage a sustainable recovery, but reiterated that the Canadian exchange rate remains a risk for future growth. Furthermore, Prime Minister Stephen Harper said that  the recovery remains “fragile,” and declared  that the nation is emerging from the economic downturn “only in a technical sense” as the rise in the Canadian dollar hampers the prospects for a sustainable recovery. As a  result, a rise in retail spending is likely to drive the exchange rate higher as the outlook for growth and inflation improves but nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk aversion is likely to weigh on the loonie as investors curb their appetite for higher-yielding currencies.

Expectations for a second consecutive rise in retail spending favors a bullish outlook for the Canadian dollar, and price action following the release could set the stage for a long loonie trade as the outlook for future growth improves. Therefore, if private consumption rises 0.6% or greater from the previous month, we will look for a red, five-minute candle subsequent to the release to generate a sell entry on two lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, fears of a protracted recovery paired with the slump in employment may lead households to curb their temperament to spending, and the Canadian dollar may face increase selling pressures following a dismal sales reading as policy makers hold a cautious outlook for future growth. As a result, if private consumption grows 0.2% or less in October, we will favor a bearish outlook for the currency, and will follow the same setup for a long dollar-loonie trade as the short position laid out above, just in reverse.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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