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USD/CAD Risks Fresh Highs as Slowing Canada CPI Fuels Rate Cut Bets

By , Currency Analyst  and Gregory Marks
21 March 2014 07:00 GMT

USD/CAD Currency Pair

- Canada Consumer Prices to Slow for First Time Since October.

- Core Inflation to Slips to 1.1%- Matching Lowest Reading for 2013.

Trading the News: Canada Consumer Price Index

A marked decline in Canada inflation may prompt a further advance in the USD/CAD as it raises the Bank of Canada’s (BoC) scope to revert back to its easing cycle.

What’s Expected:

USD-CAD-Risks-Fresh-Highs-0050_body_ScreenShot234.png, USD/CAD Risks Fresh Highs as Slowing Canada CPI Fuels Rate Cut BetsUSD/CAD Economic Event

Why Is This Event Important:

Indeed, BoC Governor Stephen Poloz showed a greater willingness to lower the benchmark interest rate further in an effort to encourage a ‘soft landing’ for the region, and the ongoing threat for disinflation may continue to dampen the outlook for the Canadian dollar as the central bank adopts a more dovish tone for monetary policy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Net Change in Employment (FEB)

15.0K

-7.0K

Gross Domestic Product (MoM) (DEC)

-0.3%

-0.5%

Retail Sales (MoM) (DEC)

-0.4%

-1.8%

The persistent slack in the real economy may continue to drag on price growth as Governor Poloz softens his outlook for growth, and a marked slowdown in inflation may continue to push the USD/CAD to fresh monthly highs as it fuels bets for a rate cut.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

New Home Price Index (YoY) (JAN)

1.3%

1.5%

Raw Materials Price Index (MoM) (JAN)

1.5%

2.6%

Industrial Product Price (MoM) (JAN)

0.5%

1.4%

Nevertheless, higher home prices along with rising input costs may limit the downside risk for price growth, and a positive development may generate a near-term rebound in the loonie as it raises the fundamental outlook for the Canadian economy.

How To Trade This Event Risk(Video)

Join DailyFX on Demand to Cover Canada’s Consumer Price Report LIVE

Bearish CAD Trade: Price Growth Slips to 1.0% or Lower

  • Need green, five-minute candle after the CPI report to consider long USD/CAD entry
  • If the market reaction favors a bearish Canadian dollar trade, establish long with two position
  • Set stop at the near-by swing low/reasonable distance from cost; use at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish CAD Trade: Canada Inflation Tops Market Forecast

  • Need red, five-minute candle following the release to look at a short USD/CAD trade
  • Carry out the same setup as the bearish loonie trade, just in the opposite direction

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Looking for Higher High Following Breakout of Triangle/Wedge Formation
  • Relative Strength Index Retains Bullish Trend Carried Over from 2013
  • Interim Resistance: 1.1310 Pivot to 1.1320 (61.8% expansion)
  • Interim Support: 1.1050 (50.0% retracement) to 1.1070 (23.6% expansion)

Read More:

Price & Time: USD Goes Bid!

Traders Get it Right as Dollar Hits it Big - What Now?

Fed Hints at 2015 Rate Hike Giving USD Much Needed Lift

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

Period

Data Released

Survey

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN

2014

02/21/2014 13:30 GMT

1.3%

1.5%

-42

-60

January 2014 Canada Consumer Price Index

USD/CAD CPI

The Canadian Dollar saw slight strength at the CPI print encompassing prices in January as the YoY figure came in at 1.5% vs. economist estimates of 1.3%. The spike higher in USD/CAD at the release set a high not broken until this past Wednesday’s FOMC Rate Decision. At Yellen’s presser we saw USD/CAD hit highs not seen since 2009 as it rocketed passed the 1.12 level. If we see any weakness here below economist expectations, more fundamental fire will fuel the 2014 breakout.

--- Written by David Song, Currency Analyst and Gregory Marks

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

To be added to David's e-mail distribution list, please follow this link.

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21 March 2014 07:00 GMT