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USD/CAD: Trading the Canada GDP Report

By , Currency Analyst
30 August 2011 20:40 GMT

Trading the News: Canada GDP

What’s Expected:

Time of release: 08/31/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.0%

Previous: 3.9%

DailyFX Forecast: -0.2% to 0.2%

Why Is This Event Important:

Economic activity in Canada is expected to hold flat in the second-quarter and the slowdown in growth is likely to weigh on the exchange rate as the GDP report reinforces a weakened outlook for the region. As the Bank of Canada lowers its fundamental assessment, Governor Mark Carney is likely to preserve his pledge to ‘carefully consider’ future rate hikes, and the central bank may show an increased willingness to carry its wait-and-see approach into the following year in an effort to balance the risks for the region. However, a positive growth report may encourage the BoC to soften its dovish tone for monetary policy, and the central bank may toughen its stance against inflation as the central bank projects price growth to hold above 3% in the near-term.

Recent Economic Developments

The Upside

Release

Expected

Actual

Retail Sales (JUN)

0.7%

0.7%

Wholesale Sales (MoM) (JUN)

-0.5%

0.2%

Housing Starts (JUL)

194.5K

205.1K

The Downside

Release

Expected

Actual

International Merchandise Trade (JUN)

-0.80B

-1.60B

Ivey Purchasing Manager Index s.a. (JUL)

61.0

46.8

Net Change in Employment (JUL)

15.0K

7.1K

The expansion in private sector consumption should help to stimulate economic activity, and an upbeat GDP report could lead the USD/CAD to extend the decline carried over from the previous week as market participants raise bets for higher borrowing costs in Canada. However, the slowdown in global trade paired with drop in business investments could impede on the economic recovery, and a dismal growth figure could lead the dollar-loonie to retrace the decline from earlier this month as interest rate expectations falter. In turn, the rebound from 0.9406 should gather momentum and the exchange rate may make another run at parity as the fundamental outlook for Canada deteriorates.

Potential Price Targets For The Report

USDCAD_Trading_the_Canada_GDP_Report_body_ScreenShot009.png, USD/CAD: Trading the Canada GDP Report

How To Trade This Event Risk

Forecasts for a flat growth reading spurs a bearish outlook for the loonie, but a positive GDP print could pave the way for a long Canadian dollar trade as the data raises the prospects of seeing higher interest rates in the coming months. As a result, if the growth rate expands from the previous year, we will need a red, five-minute candle subsequent to the release to establish a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high 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 winnings.

In contrast, the ongoing slack within the real economy is likely to bear down on the growth rate, and the slowdown in global trade could further dampen economic activity in Canada as businesses scale back on investments. Therefore, if the economy contracts from the first three-months of the year, we will carry out the same setup for a long dollar-loonie trade as the short position laid out above, just in the opposite direction.

Impact that the Canada GDP report has had on CAD during the last quarter

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

1Q 2011

5/30/2011 12:30 GMT

4.0%

3.9%

+27

+15

1Q 2011 Canada Gross Domestic Product

Economic activity increase at an annual rate of 3.9% in the first-quarter after expanding a revised 3.1% during the last three-months of 2010, but the economy is expected to face a tepid recovery as a result of the slowdown in global trade. A deeper look at the report showed a 3.2%rise in business investments even as household consumption held relatively flat from the fourth-quarter, while trade weighed down on GDP as imports climbed 2.2% versus the 1.6% expansion in exports. As the Bank of Canada curbs its outlook for future growth, we should see the central bank carry its wait-and-see approach into the second-half of the year, and Governor Mark Carney may preserve his pledge to ‘carefully consider’ future rate hikes as the BoC aims to balance the risks for the region. The Canadian dollar lost ground as the GDP print missed market expectations, with the USD/CAD advancing to a daily high of 0.9786, but the loonie regained its footing during the North American trade to settle at 0.9796 at the end of the day.

USDCAD_Trading_the_Canada_GDP_Report_body_ScreenShot008.png, USD/CAD: Trading the Canada GDP Report

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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

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30 August 2011 20:40 GMT