USD/CAD: Trading the Canadian Consumer Price Report

Trading the News: Canada Consumer Price Report

What’s Expected
Time of release:        12/17/2009 12:00 GMT, 07:00 EST
Primary Pair Impact :    USDCAD
Expected:         0.8%
Previous:         0.1%

Impact the Canada Consumer Price Report has had on USDCAD over the last 2 months

October  Canada Consumer Price Report

Price growth in Canada improved for the first time in five months,  concluding the longest slump since 1953,  with the headline reading for inflation climbing at an annualized 0.1% in October after contracting 0.9% during the previous month. At the same time, consumer prices slid 0.1% during the month subsequent to holding flat in September, while the core rate of inflation advanced at an annual pace of 1.8% from 1.5% in the month prior. The breakdown of the report showed food prices slipped 0.2% during the month, with the cost of transportation falling 0.2%, while energy prices slumped 1.9% after weakening 1.0% in September. As the Bank of Canada expects price pressures to hold below the 2% target until the third quarter of 2011, the central bank is likely to hold a dovish outlook for future policy as Governor Mark Carney aims to encourage a sustainable  recovery.

September Canada Consumer Price Report

Price pressures in Canada weakened for the fourth consecutive month in September to mark the longest slump since 1953, with the headline reading for inflation slipping 0.9% from the previous year. On the month, price held flat from August, while the core CPI slipped to an annual pace of 1.5% from 1.6%, and price pressures are likely to remain subdued going into the following year as the Bank of Canada projects inflation to hold below the 2% target until the second quarter of 2011. As a result, the central bank pledged to maintain the benchmark interest rate at the record low throughout the first half of 2010 in an effort to balance the risks for growth and inflation, and policy makers may take additional steps to shore up the economy as the marked appreciation in the Canadian dollar hampers the prospects for a sustainable recovery.

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 buy 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

Price pressures in Canada are expected to intensify in November as economists forecast consumer prices to increase at an annual pace of 0.8% from the previous month, and the data could increase the appeal of the Canadian dollar as the nation emerges from its first recession since 1992. The world’s eighth largest economy emerged from the recession in the third quarter, with the growth rate expanding 0.4% from the three-months through June, while the nation added 79.1K jobs in November, which unexpectedly pushed the annual rate of unemployment to 8.5% from 8.6% in the previous month. Moreover, retail spending advanced 1.0% for the second consecutive month in September to top forecasts for a 0.6% rise, while manufacturing sales jumped 2.0% in October to double forecasts, and conditions are likely to improve over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy. However, business spending grew at a slower pace in November as the Ivey PMI slipped to 55.9 from 61.2 in the month prior, while the industrial product price index unexpectedly fell 0.3% in October after contracting a revised 0.4% in the previous month, and the central marked appreciation in the exchange rate may continue to hamper the prospects for a sustainable recovery as the Bank of Canada forecasts inflation to hold below the 2% target until the third quarter of 2011. The BoC maintained its pledge in December to keep the benchmark interest rate at the record-low throughout the first-half of 2010 as the ongoing strength in the Canadian dollar continues to weigh on the outlook for future growth and puts “additional downward pressure on inflation,” and the central bank reiterated that the appreciation could “more than fully offset” the rebound in economic activity. In addition, 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. At the same time, former BoC Governor David Dodge said that monetary policy could “remain accommodative through 2015” as the government aims to balance public finances, but went onto say that the central bank could move away from “unconventional initiatives” as growth prospects improve. Meanwhile, a study by the BoC said that global equity prices “may have increased more than warranted” as policy makers anticipate to see a slow and protracted recovery, and noted that the rise in household’s debt-to-income ratio could post a threat to the real economy as they become increasingly vulnerable to higher interest rates.

A rise in consumer prices favors a bullish outlook for the Canadian dollar as the nation returns to growth, and price action following the release could set the stage for a long Canadian dollar trade as the economic outlook improves. Therefore, if the headline reading for inflation increases 0.8% or greater from the previous year, we will need to see a red, five-minute candle following the release to confirm a sell-entry on two-lots of USD/CAD. Once these conditions are met, we will establish the initial stop at the nearby swing high or a reasonable distance, and this risk will generate 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 lock-in our profits.

In contrast, expectations for a slow and protracted recovery paired with the marked appreciation in the exchange rate may continue to weigh on price growth, and a dismal inflation report is likely to weigh on the Canadian dollar as policy makers hold a dovish outlook for future policy. As a result, if consumer prices expand at an annual pace of 0.6% or less, we will favor a bearish outlook for the currency, and will implement the same strategy for a long dollar-loonie trade as the short position mentioned above, just in reverse.

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