trading news reports

How To Trade This Event Risk

Inflation in Canada is expected to have another historic drop as economists are predicting that consumer prices will fall to 1.5% from 2.6% in November. The report may not pack the same punch as previous ones as the markets are fully expecting price pressures to ease at a rapid pace. Inflation risks have lost some of their significance in the BoC decision making process as the downside risk to growth have considerably increased. Indeed, Manufacturing activity fell to a record low according to the IVEY PMI which dropped to 40.2 from 52.2. Additionally, the labor market started to show signs of weakness as it lost 70,600 jobs in November after a gain of 9,500 the month prior. The expectations of slower growth going forward and more job losses has weighed on consumer confidence which has led them to retrench. Despite declining prices, retail sales fell 0.9% in October and considering that wholesale sales fell 1.8%, the weakness may continue. The central bank lowered their benchmark rate by 75 bps on December 9th which was greater  that the 50bps that was predicted. Markets are pricing in another 100 bps worth of cuts over the next 12 months. However, Governor Carney’s remarks in a speech Wednesday said it was “premature” to suggest that the MPC would take measures similar to the Fed.

Given the hawkish comments from the central bank leader and the current bullish momentum of the “loonie’ a less than expected drop in inflation could lead to more gains for the currency. As a result, a print of 2.2% or higher will set the stage for a long Canadian dollar trade, and we will look for a red, five minute candle following the release to confirm a short position on two lots of USDCAD. Our initial stop will be place at the nearby swing low (or reasonable distance), and the first lot’s target will be equal to this initial risk. Our second target will be purely based on discretion, and we will move the stop on the second lot when the first trade reaches its target in order to preserve our profits.

On the other hand, easing price pressures would certainly fuel expectations for a rate cut by the BoC, and an inline print or an inflation reading below 1.5% would clearly favor a bearish outlook for the Canadian dollar. Therefore, we will follow the same setup for the short trade (long USDCAD) as the long trade mentioned above, just in reverse.





Questions or comments? Contact John Rivera at jrivera@fxcm.com