USD/CAD: Trading the Canadian Retail Sales Report

Trading the News: Canadian Retail Sales

What’s Expected
Time of release:        01/22/2009 13:30 GMT, 08:30 EST
Primary Pair Impact :    USDCAD
Expected:         -0.2%
Previous:         0.8%

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

October  2009 Canada Retail Sales

Canadian retail sales in October advanced 0.8%, from a revised 1.1% in September, with the reading falling in-line with expectations, the national statistics agency announced. The rise in sales marks the eight time gain in the past ten month, and is largely attributed to the growth in automobiles and clothing stores. The breakdown of the report showed that building and outdoor home sales gained 1.2%, while food sales tumbled 1.2%. Furthermore, sales at pharmacy and personal care stores lost 0.9% during the month. Looking ahead, retail sales are likely to remain subdued as Canada’s unemployment is at 8.5%, nearing an 11-year high, therefore causing some consumers to remain cautious, while leading others to totally scale back spending amid uncertainty in the domestic and global economy, and the Bank of Canada is likely to keep rates unchanged throughout the first-half of 2010 in order to balance the risks for growth and inflation.

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.

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

The Canadian dollar is likely to face increased volatility over the next 24 hours of trading as economists forecast retail spending to weaken 0.2% in November, and the data could reinforce a weakened outlook for future growth as households continue to face a weakening labor market paired with tightening credit conditions. A report by Statistics Canada showed economic activity expanded less than expected in October, led by a 0.7% drop in finance and insurance, while employment unexpectedly slipped 2.6K in December after rising 79.1K in the previous month, led by a 2.4K drop in full-time position. Moreover, business spending declined during the same period, with the Ivey PMI weakening to 48.4 from 55.9 in November, and firms may keep a lid on production and employment throughout the first-half of the year as trade conditions remains subdued. Meanwhile, wholesale demands surged 2.5% in November after rising a revised 0.5% in the previous month, which well exceeded expectations for a 0.5% rise, and households may raise their willingness to spending over the coming months as the expansion in monetary and fiscal policy continues to feed through the real economy. Nevertheless, the Bank of Canada held the benchmark interest rate at 0.25% earlier this week and maintained its pledge to hold borrowing costs at the record-low throughout the first-half of the year as the central bank aims to balance the risk for growth and inflation, and reiterated that ‘the persistent strength of the Canadian dollar and the low absolute level of U.S. demand” continued to pose a risk to the overall economy. In addition, the central bank said “considerable excess supply remains” and expects price pressure to hold below the 2% target until the third-quarter of 2011, and went onto say that the board retains “considerable flexibility” in its management of monetary policy  even as the interest rate remains at its lowest level since the BoC was established in 1934. Furthermore, the central bank anticipates economic activity to peak in the second-quarter of this year and projects the growth rate to rise at an annual pace of 2.9% in 2010 and 3.5% in the following year during  its Monetary Policy Report, and said “consumer spending is expected to grow at a solid pace” as household sentiment improves. However, Governor Mark Carney held a cautious outlook for the economy and does not expect to see a sharp rebound in employment as businesses maintain low-levels of output, and expects “real growth” to average 2% beyond 2011.

Expectations for a drop in retail spending favors a bearish outlook for the Canadian dollar as investors weigh the prospects for a sustainable recovery within the region but nevertheless, an enhanced sales report could set the stage for a long loonie trade as the economy emerges from the recession. Therefore, if household consumption rises 0.2% or greater in November, we will need to see a red, five-minute candle following the release to establish a short 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 determine 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 spend, and dismal sales report could drag on the exchange rate as market participants weigh the prospects for a sustainable recovery. As a result, if private spending slumps 0.2% or greater from the previous month, we will favor a bearish outlook for the Canadian dollar, and will follow the same strategy 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