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USDCAD: Trading Canada’s Retail Sales Report

By , Currency Analyst
22 May 2012 21:40 GMT

Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 05/23/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 0.3%

Previous: -0.2%

DailyFX Forecast: 0.2% to 0.5%

Why Is This Event Important:

Retail spending is expected to increase 0.3% after unexpectedly contracting 0.2% in February and the rebound in household consumption may prop up the Canadian dollar as it heightens the scope for a rate hike. According to Credit Suisse overnight index swaps, market participants see the Bank of Canada raising the benchmark interest rate over the next 12-months as the central bank drops its dovish tone for monetary policy, and we may see a short-term reversal in the USDCAD as Governor Mark Carney talks up speculation for higher borrowing costs. However, as Mr. Carney continues to highlight the record-rise in household indebtedness, we should see the BoC refrain from a series of rate hikes, and a potential rise in the interest rate may be a one-time deal as the central bank aims to address the risks surrounding the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Wholesale Sales (MoM) (MAR)

0.3%

0.4%

Manufacturing Sales (MoM) (MAR)

0.4%

1.9%

Net Change in Employment (APR)

10.0K

58.2K

The Downside

Release

Expected

Actual

Consumer Price Index (YoY) (APR)

1.9%

2.1%

Industrial Product Price (MoM) (MAR)

0.0%

0.2%

Gross Domestic Product (FEB)

0.2%

-0.2%

The rise in private sector consumption paired with the ongoing improvement in the labor market certainly bodes well for retail sales, and a marked rebound in household spending may ultimately trigger a short-term correction in the exchange rate as market participants increase bets for a rate hike. However, as Canadians continue to face sticky inflation, ongoing price pressures may drag on consumption, and we may see the BoC carry its wait-and-see approach into the second-half of the year should the data foster a weakened outlook for the region. In turn, we may see the dollar-loonie continue to retrace the decline from earlier this year, but we will be keeping a close eye on the relative strength index as it continues to flirt with overbought territory.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot030.png, USDCAD: Trading Canada’s Retail Sales Report

As the relative strength index fails to maintain the upward trend from the end of April, the USDCAD looks poised for a short-term correction, and a rebound in Canadian retail sales may spark a move back towards former resistance around 1.0050, which should act as new support. However, as the moving averages start to break away from one another, the bullish breakout in the dollar-loonie may gather pace over the near-term, and we may see the pair come up against the 2012 high (1.0318) should the data fall short of market expectations.

How To Trade This Event Risk

Trading the given event risk certainly instills a bullish outlook for the loonie as market participants expect to see a rebound in household consumption, and a positive print may pave the way for a long Canadian dollar trade as it fuels speculation for a rate hike. Therefore, if sales increases 0.3% or more in March, 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 low or a reasonable distance from the entry, 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 hits its mark in order to lock-in our profits.

However, the rise in household debt paired with sticky inflation may drag on discretionary spending, and a dismal consumption report could spark a run at the 2012 high as it dampens the scope for higher borrowing costs. As a result, if the print falls short of market forecast, we will implement the same setup for a long dollar-loonie trade as the short position laid out above, just in reserve.

Impact that the Canada Retail Sales 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)

FEB 2011

04/24/2012 12:30 GMT

0.1%

-0.2%

0

-23

February 2012 Canada Retail Sales

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot029.png, USDCAD: Trading Canada’s Retail Sales Report

Household spending unexpectedly weakened for the first time in seven-months as demands for motor vehicles and parts slipped 2.4% from the previous month, while the reading for January showed a 0.2% advance amid an initial forecast for a 0.5% rise. Indeed, the USDCAD pushed back above the 0.9900 figure following the report, but the market reaction was short-lived as the pair ended the day at 0.9869.

--- 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.

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22 May 2012 21:40 GMT