USD/CAD: Trading the Canadian Retail Sales Report

Trading the News: Canada Retail Sales

Why Is This Event Important:

However, as the Bank of Canada lowers its growth forecast and adopts a neutral outlook for future policy, the central bank may see scope to hold borrowing steady over the coming months as the United States, the region’s biggest trading partner, faces a risk for a protracted recovery.

What’s Expected:

Time of release:08/24/2010 12:30 GMT, 8:30 EST

Primary Pair Impact :USDCAD

Expected: 0.4%

Previous: -0.2%

Will This Be Market Moving (Scenarios):

Retail spending in Canada are forecasted to expand 0.4% in June following the unexpected 0.2% contraction in the previous month, while sales excluding autos is projected to increase 0.1%, and households may raise their rate of consumption throughout the remainder of the economy recoups most of the jobs lost during the recession. However, the uncertainties surrounding the economic outlook paired with the recent rise in the interest rate could discourage private consumption, and another unexpected contraction in sales would drag on the exchange rate as investors weigh the prospects for future growth.

The Upside

As businesses continue to absorb higher input costs and keep a lid on price growth, households may increase spending, and the data could spark a bullish reaction in the Canadian dollar as the economic outlook improves. As a result, the USD/CADcould retrace the decline carried over from the previous week and work its way back towards the 200-Day SMA at 1.0385 to test for near-term, but another leg lower would expose the 100-Day SMA at 1.0330.

The Downside

However, the recent drop in employment paired with the contraction in wholesale consumption reinforces a weakening outlook for household spending, and a drop in retail sales could lead the BoC to keep the benchmark interest rate unchanged in September as it aims to encourage a sustainable recovery. Accordingly, a dismal spending report could lead the dollar-loonie to full retrace the decline from the previous month and push the exchange rate towards the July high at 1.0676.

How To Trade This Event Risk

Projections for a rebound 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 economic outlook improves. Therefore, if sales increases 0.4% or greater from the previous month, we will need to see a red, five-minute candle following the data to establish a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the slump in employment paired with the rise in borrowing costs could lead households to scale back on consumption, and a dismal spending report is likely to weigh on the exchange rate as the economic outlook remains clouded with uncertainties. As a result, if sales unexpectedly slips another 0.2% or greater in June, we will favor a bearish outlook for the Canadian currency, and will implement the same setup for a long dollar-loonie trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

Impact Canada Retail Sales has had on CAD during the previous month

May 2010 Canada Retail Sales

Retail spending in Canada unexpectedly slipped 0.2% in May amid forecasts for a 0.4% rise, while sales excluding auto sales fell 0.1% during the same period after contracting a revised 1.3% in April. The breakdown of the report showed sales of building materials slumped 4.1%, with gasoline receipts falling 2.3%, while discretionary spending of clothing increased 2.6% from the previous month. However, as the labor market improves, with the economic recovery gathering pace, the Bank of Canada may see scope to normalize monetary policy further in the second half of the year in an effort to balance the risks for growth and inflation. However, as central bank Governor Mark Carney lowers the growth forecast and adopts a neutral outlook for future policy, the BoC may keep rates on hold over the coming months as the economic outlook remains clouded with uncertainties.

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.

Questions? Comments? Join us in the DailyFX Forum

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