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USDCAD: Trading Canada’s Consumer Price Report

By , Currency Strategist  and , Currency Analyst
23 March 2012 09:00 GMT

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 03/23/2012 11:00 GMT, 7:00 EST

Primary Pair Impact: USDCAD

Expected: 2.7%

Previous: 2.5%

DailyFX Forecast: 2.5% to 2.6%

Why Is This Event Important:

Consumer prices in Canada are expected to increase an annualized 2.7% after expanding 2.5% in January, and the faster rate of price growth may prop up the Canadian dollar as it raises the scope for a rate hike. As price pressures pick up, the BoC may sound more hawkish going into April, but the central bank may stick to the sidelines throughout 2012 as Governor Mark Carney expects to see a ‘more modest’ recovery across the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (FEB)

62.0

66.5

Gross Domestic Product (MoM) (DEC)

0.3%

0.4%

Industrial Product Price (MoM) (JAN)

0.3%

0.3%

The Downside

Release

Expected

Actual

Retail Sales (MoM) (JAN)

1.8%

0.5%

Wholesale Sales (MoM) (JAN)

0.3%

-1.0%

Manufacturing Sales (MoM) (JAN)

0.2%

-0.9%

As the economic recovery in Canada gathers pace, the rise in private sector activity may ultimately produce to a higher-than-expect print, and a large uptick in consumer prices could spark a sharp selloff in the USDCAD as market participants raise bets for a rate hike. However, the slowdown in private sector consumption may encourage businesses to keep a lid on consume prices, and a soft inflation reading may lead the BoC to preserve a wait-and-see approach throughout 2012 as the fundamental outlook for the region remains clouded with uncertainties. In turn, the short-term rebound in the dollar-loonie may gather pace going into the end of the week, and we may see the pair retrace the decline from back in February as interest rate expectations falter.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Consumer_Price_Report_body_03.png, USDCAD: Trading Canada’s Consumer Price Report

A look at the encompassing structure shows the USDCAD breaching key trendline resistance dating back to the November 25th high and suggests that the pair may continue higher in the days to come. Daily resistance now stands at the 200-day moving average at parity with a breach eyeing critical resistance at the 61.8% Fibonacci extension taken from the October 4th and November 25th crests at 1.0050. Multiple attempts at a breach above this level over the past several month met with substantial pullbacks and as such we reserve this level as our topside limit which if compromised offers further conviction on our directional bias. Daily support rests with the 78.6% extension at 9920.

USDCAD_Trading_Canadas_Consumer_Price_Report_body_03_1.png, USDCAD: Trading Canada’s Consumer Price Report

Our 30min scalp chart once again highlights parity which rests with the 78.6% Fibonacci extension taken from the March 1st and the 19th troughs. A breach above this level eyes subsequent topside targets 1.0025 and the 100% extension at 1.0045 with extended targets seen at 1.0070 and the 123.6% extension at 1.0090. Interim support rests at the 61.8% extension at 9975 backed by 9950 and the 38.2% extension at 9930. Should the print prompt a bearish loonie reaction (bullish USDCAD) look to target topside levels with a breach above the 1.0050 offering further conviction on our directional bias.

How To Trade This Event Risk

Expectations for a faster rate of price growth casts a bullish outlook for the loonie, and an uptick in the CPI could set the stage for a long Canadian dollar trade as it fuels speculation for higher borrowing costs, Therefore, if the print crosses the wires at 2.7% or higher, we will need a red, five-minute candle following the release to generate a sell entry on two-lots of USDCAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target 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 profits.

However, as the BoC sees the economic operating below full capacity well into the following year, the ongoing slack across the region may weigh on price growth, and a soft inflation report could spark a bearish reaction in the Canadian dollar as it weighs on interest rate expectations. As a result, should the CPI fall short of market expectations, we will carry out the same setup 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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2012

2/17/2012 12:00 GMT

2.3%

2.5%

-9

+14

January 2012 Canada Consumer Price Index

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot052.png, USDCAD: Trading Canada’s Consumer Price Report

The headline reading for Canadian inflation unexpectedly increased 2.5% in January after expanding 2.3% in the previous month, but the uptick in price growth may be short-lived as the Bank of Canada sees the economy operating below full capacity well into 2013. The Canadian dollar advanced against its U.S. counterpart immediately following the above-forecast print, but the loonie struggled to hold its ground during the North American trade as the USDCAD ended the day at 0.9971.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

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

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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23 March 2012 09:00 GMT