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Bearish USD/CAD Break in Focus- Canada CPI to Trigger Fresh Lows?

By , Currency Analyst
20 June 2014 07:00 GMT

- Canada Consumer Price Index to Hold Steady at 2.0% for Second Straight Month.

- Core Rate of Inflation to Increase 1.5%- Fastest Pace of growth Since August 2012.

Trading the News: Canada Consumer Price Index

Despite expectations of seeing a 0.6% rebound in Canada Retail Sales, the Consumer Price Index (CPI) may play a greater role in driving the USD/CAD as the Bank of Canada (BoC) retains a rather dovish tone for monetary policy.

What’s Expected:

USD/CAD CPI

Why Is This Event Important:

A further pickup in core price growth may encourage the BoC to adopt a more hawkish tone for monetary policy, and we may see Governor Stephen Poloz continue to talk down bets for a rate cut should the data print curb the threat for disinflation.

For LIVE SSI Updates Ahead of Canada’s CPI Print, Join DailyFX on Demand

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (MAY)

--

5.9%

Net Change in Employment (MAY)

25.0K

25.8K

Average Weekly Earnings (YoY) (MAR)

--

3.1%

The pickup in wage growth paired with the ongoing recovery in private sector activity may limit the downside risk for inflation, and a strong CPI print may generate fresh monthly lows in the USD/CAD as market participants scale back bets of seeing lower borrowing costs in Canada.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (MAY)

56.0

48.2

Gross Domestic Product (Annualized) (1Q)

1.8%

1.2%

Retail Sales (MoM) (MAR)

0.3%

-0.1%

However, firms may offer discounted prices amid the slowdown in economic activity along with the downturn in private sector spending, and a weaker-than-expected inflation print may spur a near-term correction in the USD/CAD as it raises the risk for a rate cut.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Core Inflation Rises 1.5% or Greater

  • Need red, five-minute candle following 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 Disappoints

  • 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 the opposite direction

Potential Price Targets For The Release

USD/CAD Daily

Bearish USD/CAD Break in Focus- Canada CPI to Trigger Fresh Lows?

Chart - Created Using FXCM Marketscope 2.0

  • Fails to Retain Series of Higher-Highs/Lows; Bearish RSI Break Favors Downside Target
  • Interim Resistance: 1.1000 (1.618% expansion) to 1.1020 (23.6% retracement)
  • Interim Support: 1.0710 (100.0% expansion) to 1.07309

Read More:

Bearish USD Setup Continues to Take Shape- AUD/JPY Range in Focus

USD/CAD Technical Analysis – Support Above 1.08 in Focus

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)

APR

2014

05/23/2014 12:30 GMT

2.0%

2.0%

-15

-27

April 2014 Canada Consumer Price Index (CPI)

USD/CAD Chart

The headline reading for Canada inflation climbed an annualized 2.0% in April to mark the fastest pace of growth since April 2012, while the core Consumer Price Index (CPI) advanced 1.4% after expanding 1.3% the month prior. The uptick in price growth propped up the Canadian dollar, with the USD/CAD slipping back below the 1.0900 handle, and the dollar-loonie continued to trade lower throughout the day as the pair closed at 1.0864.

--- 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, please follow this link.

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20 June 2014 07:00 GMT