USD/CAD: Trading the Canadian Retail Sales Report

Trading the News: Canadian Retail Sales

What’s Expected
Time of release:        12/21/2009 13:30 GMT, 08:30 EST
Primary Pair Impact :    USDCAD
Expected:         0.7%
Previous:         1.0%

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

September 2009 Canada Retail Sales

Retail sales in Canada climbed 1.0% in September amid economists’ expectations for a 0.6% rise, led by increased demands for autos, food and general merchandise shops. The breakdown of the report illustrated that sales were higher in eight of the major retail components, with sales in food and beverages climbing 1.3%, followed by a 1.0% and  a1.9% gain in automotive sales and general merchandise store. On the other hand, retail sales were 3.3% below the level from September 2008. The data encourages an improved outlook for future growth and conditions should continue to improve as the expansion in monetary and fiscal policy feeds through the real economy, and the Bank of Canada is likely to maintain its pledge to hold borrowing costs at the record-low throughout the first-half of the year as the central bank aims to encourage a sustainable recovery.

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.

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

Household spending in Canada is expected to improved for the third consecutive month in October as economists forecast retail sales to increase 0.7% from the previous month, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. 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. In addition, demands for new motor vehicles advanced 3.5% in October after increasing a revised 1.7% during the previous month, while manufacturing sales surged 2.0% during the same period amid projections for a 1.0% rise, and households may ramp up their willingness to spend as the Bank of Canada forecasts economic activity to expand at an annual pace of 3.3% in the fourth quarter. 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 capacity utilization rate slipped to 67.5% in the third quarter from a revised 67.7% to mark the lowest level of since recordkeeping began since 1987, and firms may keep a lid on production and employment throughout the following year as trade conditions remain subdued. Nevertheless, the Bank of Canada held borrowing costs at the record-low in December and maintains its pledge to keep the interest rate at 0.25% 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.” Moreover, Governor Mark Carney reiterated that the marked appreciation could “more than fully offset” the rebound in economic activity and stated that the central bank has “options” to temper the rise in the exchange rate during a speech in front of the Senate banking committee, and noted that the “slack” in the economy is likely to keep price pressures subdued throughout the following year as policy makers anticipate inflation to hold below the 2% target until the second-half of 2011. More recently, the Mr. Carney said that consumers and banks should prepare for rising borrowing costs as the central bank aims to normalize policy going forward, 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. 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.

Trading the given event risk favors a bullish outlook for the Canadian dollar as market participants anticipate retail spending to rise for the third consecutive month in October, and price action following the release could set the stage for a long loonie trade as growth prospects improve. Therefore, if household consumption increases 0.7% or greater from the previous month, we would need to a see 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 place the initial stop at the nearby swing long 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 lock-in our profits.

On the other hand, expectations for higher borrowing costs paired with fears of a protracted recovery may lead households to lower their temperament to spend, and a dismal sales report is likely to weigh on the exchange rate as investors weigh the outlook for future growth. As a result, if private consumption expands 0.2% or less from September, we will favor a bearish outlook for the Canadian currency, and will follow 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