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USD/CAD Breakout to Accelerate on Disappointing Canada CPI

By , Currency Analyst  and Gregory Marks
23 May 2014 07:00 GMT

- Canada Consumer Price Reading of 2.0% Will Mark Highest Price Since April 2012.

- Core Rate of Inflation to Increase for Third Time in 2014.

Trading the News: Canada Consumer Price Index

A sharp rebound in Canada’s Consumer Price Index (CPI) may generate a larger pullback in the USD/CAD as the pair struggles to push back above former support around 1.0930-40.

What’s Expected:

USD/CAD CPI

Why Is This Event Important:

Despite the dovish tone for monetary policy, heightening price pressures may limit the Bank of Canada’s (BoC) scope to further embark on its easing cycle, and the bearish momentum in the USD/CAD may get carried into June should the data print prop up interest rate expectations.

Join DailyFX on Demand to Cover Canada’s CPI LIVE

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (APR)

--

2.7%

New Housing Price Index (YoY) (MAR)

--

1.6%

Housing Starts (APR)

175.0K

194.8K

The ongoing recovery in private sector activity paired with the resilience in the housing market may spur a meaningful rebound in the CPI, and a stronger-than-expected inflation print may heighten the appeal of the Canadian dollar as it dampens expectations for a rate cut.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (MAR)

0.3%

-0.1%

Wholesale Trade Sales (MoM) (MAR)

0.4%

-0.4%

Net Change in Employment (APR)

12.0K

-28.9K

However, firms may continue to offer discounted price amid the persistent weakness in the labor market along with the slowdown in private sector, and a dismal release may instill a more bullish outlook for the USD/CAD as it appears to be carving a higher-low in May.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Headline Inflation Climbs 2.0% or Greater

  • Need red, five-minute candle after the CPI report to consider short USD/CAD entry
  • If the market reaction favors a bullish Canadian dollar trade, establish short with two position
  • Set stop at the near-by swing high/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

Bearish CAD Trade: Canada Price Growth Falls Short of Market Forecast

  • Need green, five-minute candle following the release to look at a long USD/CAD trade
  • Carry out the same setup as the bullish loonie trade, just in reverse

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Breakout to Accelerate on Disappointing Canada CPI

Chart - Created Using FXCM Marketscope 2.0

  • Need Break of Bearish RSI Momentum to Favor Topside Targets
  • Interim Resistance: 1.1000 (1.618% expansion) to 1.1020 (23.6% retracement)
  • Interim Support: 1.0850 (61.8% retracement) to 1.0870 (100% expansion)

Read More:Canadian Retail Sales Decline in March, USDCAD Rallies

USD/CAD Capped Near 1.0940 As Doji Forms On Daily

Impact that the Canada CPI 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)

MAR

2014

04/17/2014 12:30 GMT

1.4%

1.5%

-12

flat

March 2014 Canada Net Change in Employment

USD/CAD

The Canadian Dollar strengthened against the greenback following better than expect CPI for March. The print came in at a tenth of a percent higher, but CAD strength was quickly retraced by the end of the day. Although on a technical basis we may have set a USDCAD low, it may take weak CAD data and inflation coming in on the downside to prompt fundamental CAD selling.

--- 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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23 May 2014 07:00 GMT