USD/CAD: Trading the Canadian Ivey PMI Report

Trading the News: Canada Ivey PMI

Why Is This Event Important:

Business spending in Canada is expected to expand at a slower pace in December, and the data could weigh on the exchange rate as the central bank lowers its forecast for future growth. After holding the benchmark interest rate at 1.00% in December, the Bank of Canada warned that the economic recovery “appears slightly weaker” than initially expected, and the central bank is likely to retain its wait-and-see approach throughout the first quarter of 2011 as the fundamental outlook remains clouded with high uncertainty.

What’s Expected:

Time of release:01/06/2011 15:00 GMT, 10:00 EST

Primary Pair Impact :USDCAD

Expected: 54.0

Previous: 57.5

Will This Be Market Moving (Scenarios):

Canada’s Ivey purchasing manger index is forecasted to fall back to 54.0 in December from 57.5 in the previous month, and firms may rein in on spending throughout 2011 as policy makers anticipate the economy to operate below full-capacity over the next two-years. In turn, the BoC may continue to talk down speculation for a rate hike, and Governor Mark Carney is likely to retain a dovish outlook for future policy as underlying price pressures “remain largely unchanged.”

The Upside

A report by Statistics Canada showed retail spending increased for the fifth consecutive month in October, with the trade surplus narrowing to C$1.71B from C$2.31B during the same period, and the recent developments may encourage firms to increase their rate of consumption as demands from home and aboard gather pace. An unexpected rise in business spending could spark a bullish reaction in the Canadian dollar and lead the USD/CAD to test the monthly low at 0.9887 as the outlook for future growth improves.

The Downside

However, as the marked rebound in economic activity tapers off, with businesses facing rising input costs, the substantial margin of slack within the private sector may lead firms to scale back on spending as the central bank maintains a cautious outlook for the region. Accordingly, a significant drop in the PMI could lead the USD/CAD to retrace the sharp decline from the previous month, and price action may work its way back to the 20-Day moving average at 1.0055 as the prospects for growth and inflation deteriorate.

How To Trade This Event Risk

Expectations for a slower pace of business spending clearly favors a bearish outlook for the Canadian dollar, but an unexpected expansion in the Ivey PMI could pave the way for a long loonie trade as the prospects for future growth improves. As a result, if the index advances to 60.0 or higher in December, we will need a red, five-minute candle following 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 after taking market volatility into account, and this risk will establish 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 uncertainties surrounding the economic outlook paired with the ongoing weakness within the private sector could weigh on business sentiment, and a drop in spending could spark a selloff in the Canadian dollar as investors scale back expectations for a rate hike in the first quarter. Therefore, if the PMI slips to 54.0 or lower from the previous month, we will utilize the same strategy for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Potential Price Targets For The Release

Impact the Canadian Ivey PMI has had on CAD during the last month

November 2010 Canada Ivey PMI

Business spending in Canada expanded at a faster pace in November, with the Ivey PMI advancing to 57.5 from 56.7 in the previous month, but the slowdown in global trade could bear down on the economic recovery as the private sector remains weak. The breakdown of the report showed the index for business inventories slipped to 41.7 from 46.4 in October, with the gauge for supplier deliveries falling to 44.0 from 50.0, while the employment component bounced back to 54.8 from 51.7 in the month prior. As the economic outlook remains clouded with uncertainties, the Bank of Canada is widely expected to hold the benchmark interest rate at 1.00% this month in order to balance the risk for the region, and the central bank may retain its wait-and-see approach going into 2011 as policy makers lower their outlook for future growth. In turn, the BoC may show an increased willingness to support the real economy over the following year, and the central bank may curb speculation for additional monetary tightening given the ongoing slack within the private sector.

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.

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