USD/CAD: Trading Canada’s Consumer Price Report

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 11/18/2011 12:00 GMT, 7:00 EST

Primary Pair Impact: USDCAD

Expected: 2.8%

Previous: 3.2%

DailyFX Forecast:2.6% to 2.8%

Why Is This Event Important:

Consumer prices in Canada are expected to increase at an annual rate of 2.8% in September amid the 3.2% expansion in the previous month, and a soft inflation report is likely to weigh on the exchange rate as the central bank turns increasingly cautious towards the economy. As the Bank of Canada keeps the benchmark interest rate at 1.00%, slowing recovery should lead the central bank to carry its current policy into the following year, but Governor Mark Carney may talk up speculation for lower borrowing costs as policy makers expect the economy to operate below full-capacity until the end of 2013. However, the BoC may continue to strike a neutral tone for future policy as the central bank expects economic activity to gradually gather pace over the coming months, and the central bank may endorse a wait-and-see approach in 2012 as policy makers see a modest recovery next year.

Recent Economic Developments

The Upside

The Downside

Rising input costs paired with the expansion in household spending may encourage businesses to pass on higher costs onto consumers, and an above-forecast print could lead the USD/CAD to give back the advance from earlier this week as market participants see the BoC toughening its stance against inflation. However, firms may keep a lid on consumer prices as Canadians face a slowdown in employment, and the central bank may take additional steps to stimulate the economy as it looks to encourage a sustainable recovery. In turn, the USD/CAD may continue to retrace the sharp reversal from 1.0656, and the exchange rate may trend higher over the near-term as speculation for a rate cut resurface.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for a slower rate of inflation casts a bearish outlook for the loonie, but an above-forecast print could set the stage for a long Canadian dollar trade as market participants weigh the prospects for future policy. Therefore, if consumer prices increase more than 2.8% from the previous year, we will need a green, 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 place the initial stop at the nearby swing high or a reasonable distance from the entry, 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 order to preserve our winnings.

On the other hand, we may see a soft CPI report as businesses conduct heavy discounting to stimulate demands, and the BoC may continue to soften its hawkish tone for monetary policy as growth and inflation falter. As a result, if the headline reading grows 2.8% or less in October, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Impact that the Canada Consumer Price report has had on CAD during the last month

September 2011 Canada Consumer Price Index

The headline reading for inflation advanced at an annualized pace of 3.2% in September after expanding 3.1% in the month prior, while the core CPI increased 22% during the same period to mark the fastest pace of growth since 2008. A deeper look at the report showed prices for clothing and shoes increased 4.9% during the month, with transportation costs advancing 0.4%, while prices for food slipped another 0.5% following the 0.1% drop in August. Despite the higher-than-expected print for inflation, it seems as though the Bank of Canada will maintain its current policy throughout the remainder of the year given the slowing recovery, and the central bank may carry a wait-and-see approach into 2012 as Governor Mark Carney softens his hawkish tone for future policy. The above-forecast print sparked a bullish reaction in the Canadian dollar, with the USD/CAD falling back to 1.0100, and the loonie continued to gain ground throughout the North American trade as the exchange rate settled at 1.0084 at the end of the day.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song in the DailyFX Trading Room to cover the event LIVE!

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