FX Week Ahead - Top 5 Events: August Canada Inflation Report & USD/CAD Rate Forecast
Canada Inflation Report Preview:
- The August Canada inflation report (consumer price index) is due on Wednesday, September 18 at 12:30 GMT, and the data will likely show a softening in price pressures.
- The lack of upside in oil prices in recent weeks may be the culprit for declining inflation readings; the energy sector constitutes roughly 11% of the Canadian economy.
- Recent changes in retail trader positioninggive us a stronger USDCAD-bullish contrarian trading bias
Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.
09/18 WEDNESDAY | 12:30 GMT | CAD Consumer Price Index (AUG)
Volatility in energy markets during August likely can be blamed for any near-term downswing in price pressures, as the upcoming Canada inflation report will show. At approximately 11% of GDP, the energy sector and therefore the performance of oil prices tend to have outsized influences on Canadian economic data.
Acordingly, a Bloomberg News survey’s consensus forecasts suggest a softening in price pressures. Headline August Canada inflation due in at 1.9% from 2.0% (y/y), while the monthly reading is due in at -0.2% from 0.5% (m/m). It still holds that movement in energy markets will guide the Canadian Dollar and inflation all the same.
BANK OF CANADA INTEREST RATE EXPECTATIONS (SEPTEMBER 13, 2019) (TABLE 1)
Now that the US-China trade war is in a state of truce, G10 currencies’ central banks have seen their easing expectations drop in recent weeks; the Bank of Canada is no different. As such, soft inflation data may be otherwise dismissed. Traders should keep expectations low for a policy change from the Bank of Canada any time soon; the odds for additional stimulus have moved sharply lower in recent weeks. Four weeks earlier, overnight index swaps were pricing in only a 66% chance of a 25-bps rate cut in October; now, odds of an October rate cut are 10%.
USDCAD TECHNICAL ANALYSIS: WEEKLY RATE CHART (DECEMBER 2016 TO SEPTEMBER 2019) (CHART 1)
The bearish outside engulfing bar at recent trend highs marked a bearish key reversal last week, but USDCAD rates did not follow through to the downside. As a result, weekly MACD has turned higher once again just below its signal line, while Slow Stochastics continue to grind higher above the median line. Bullish momentum is slowly reasserting itself.
USDCAD Rate Technical Forecast: Daily Chart (September 2018 to September 2019) (Chart 2)
As noted in the last USDCAD technical forecast update, “USDCAD’s bearish outlook may be curtailed unless there is a decisive shift in retail trader positioning, which currently takes the opposite perspective on recent price action.” The bearish outlook was indeed curtailed; and the shifts in retail trader positioning provided the proper clues for a bullish reversal coming into this week.
It remains the case that USDCAD is below the rising trendline from the July and August 2019 swing lows, even if price action has started to reestablish itself above 1.3250. The daily 8-, 13-, and 21-EMA envelope is shifting back into bullish sequential order. Slow Stochastics have risen out of oversold territory, while daily MACD has started to turn higher prior at its signal line. Further gains may eye the 38.2% retracement of the 2018 high/low range at 1.3328 in the short-term.
IG CLIENT SENTIMENT INDEX: USDCAD RATE FORECAST (SEPTEMBER 6, 2019) (CHART 3)
USDCAD: Retail trader data shows 41.2% of traders are net-long with the ratio of traders short to long at 1.43 to 1. The number of traders net-long is 24.3% lower than yesterday and 18.1% lower from last week, while the number of traders net-short is 5.7% higher than yesterday and 17.9% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian trading bias.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.