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USD/CAD: Trading the Canada 1Q GDP Report

USD/CAD: Trading the Canada 1Q GDP Report

2010-05-28 18:08:00
David Song, Currency Strategist
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Trading the News: Canada 1Q GDP

Why Is This Event Important:


As economic activity in the world’s eighth largest economy is expected to expand at the fastest pace in over a decade, the first quarter growth report could drive the Canadian dollar as the recovery gathers pace. With the outlook for growth and inflation improving, market participants speculate the Bank of Canada to raise interest rate in June to 0.50% from the record-low of 0.25%, and the central bank may look to normalize policy throughout the second-half of the year in order to balance the risks for the economy.

What’s Expected:
Time of release:        05/31/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    USDCAD
Expected:         5.8%
Previous:         5.0%

Will This Be Market Moving (Scenarios):


The growth rate in Canada is expected to increase 5.8% in the first-quarter after expanding 5.0% during the last three-months of 2009, which would be the biggest advance since the third-quarter of 1999, and the rebound in economic activity could lead the Bank of Canada to raise its assessment for the region as growth prospects improve. Nevertheless, a Bloomberg News survey shows 24 of the 26 economists polled forecast the BoC to raise the interest rate to 0.50% next month, while investors are pricing 68% chance for a 25bp rate hike according to Credit Suisse overnight index swaps.

The Upside


As household spending improves, with employment increasing at the fastest pace on record, the rise in private sector consumption could lead to better-than-expected growth report, which could lead to a bullish breakout in the Canadian dollar. At the same time, Credit Suisse overnight index swaps show investors speculate the BoC to raise borrowing costs by nearly 100bp over the next 12-months, and a marked expansion in the growth rate could stoke a rise in interest rate expectations as price pressures intensify.

The Downside


However, as the BoC expects investment in housing to “weaken markedly though the reminder of 2010 and well into 2011” and sees the strength in the exchange rate dragging on economic activity, the release may fail to meet market expectations, which could spark a bearish reaction in the Canadian dollar. As a result, a dismal growth report would allow the central bank to support the economy over the coming months, which could lead to a drop in interest rate expectations as market participants weigh the outlook for future policy.

How To Trade This Event Risk

With market participants anticipating to see the growth rate rise at the fastest pace in over a decade, price action following the data could set the stage for a long Canadian dollar trade as the prospects for a sustainable recovery improve. Therefore, if GDP expands 5.8% or greater in the first quarter, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its market in order to preserve our profits.

On the other hand, the marked appreciation in the exchange rate paired with the deterioration in housing investments could weigh on economic activity, and a dismal GDP reading could weigh on the exchange rate as the outlook for future growth weakens. As a result, if the growth rate expands 4.0% or less, we will favor a bearish outlook for the Canadian currency, and will take the same approach for a long dollar-loonie trade as the short position laid out above, just in reverse,

05.28_TTN1

Impact that the Canada GDP has had on CAD during the last quarter

05.28_TTN2

4Q 2009 Canada GDP

Economic activity in Canada expanded at an annualized pace of 5.0% in the fourth-quarter to mark the fastest pace of growth since 2000, and conditions are likely to improve going forward as the government stimulus continues to feed through the real economy. The breakdown of the report showed private consumption increased 0.9%, with investment in housing advancing 6.5%, while exports gained 3.7% following the recovery in the global economy. Nevertheless, Bank of Canada Governor Mark Carney is expected to hold the benchmark interest rate at 0.25% throughout the first-half of the year as the central bank aims to encourage a sustainable recovery, but may look to normalize policy further in the latter half of 2010 as the rebound in economic activity gathers pace. 05.28_TTN3

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.
Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.
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Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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