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USD/CAD: Trading the Canadian Retail Sales Report

USD/CAD: Trading the Canadian Retail Sales Report

2010-07-20 19:37:00
David Song, Currency Strategist
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Trading the News: Canada Retail Sales

Why Is This Event Important:

However, as households face tightening credit conditions, with the Bank of Canada maintaining a cautious look for the region, a dismal sales report would weigh on the exchange rate as investors scale back expectations for another rate hike.

What’s Expected:

Time of release:        07/22/2010 12:30 GMT, 8:30 EST
Primary Pair Impact :    USDCAD
Expected:         0.4%
Previous:         -2.0%

Will This Be Market Moving (Scenarios):

Private consumption in forecasted to increase 0.4% after contracting 2.0% in April, while sales excluding autos are projected to expand 0.5%, and the recovery in personal spending may gather pace over the coming months as the labor market improves. At the same time, households may look to keep a lid on consumption as the outlook for future growth remains clouded with uncertainties, and a drop in spending could lead the USD/CAD to pare the decline from earlier this week as the outlook for growth deteriorates.

The Upside

A report by Statistics Canada showed employment increased 93.2K in June, which topped expectations for a 20.0K rise, while the jobless rate unexpectedly slipped to 7.9% from 8.1% in May to mark the lowest reading since January 2009, and the improvement in the labor market may encourage households to expand their rate of consumption as the recovery gathers pace. As a result, the BoC may see scope to raise the benchmark interest rate for the third time in September, and the central bank may adopt a hawkish outlook over the coming months as growth and inflation picks up.

The Downside


However, as the BoC lowers its 2010 growth forecast and sees the economy expanding at an annualized pace of 3.5% amid an initial forecast for a 3.7% rise in the growth rate, the downward revision in the GDP forecast suggests the recovery is tapering off as the government stimulus fades. Therefore, an unexpected drop in private spending could lead the central bank to maintain a cautious outlook for the region and adopt a wait-and-see approach over the coming months as it aims to encourage a sustainable recovery.

How To Trade This Event Risk

Trading the given event risk favors a bullish outlook for the Canadian dollar, and price action following the release could set the stage for a long loonie trade as the outlook for future growth improves. Therefore, if retail sales increases 0.4% or greater in May, we will need to see a five-minute candle following the data 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 low or a reasonable distance, and this risk will establish our initial target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, tightening credit conditions paired with the cautious outlook held by the central bank could weigh on households’ temperament to spend, and a second consecutive drop in private consumption could lead the BoC to keep rates on hold a their next meeting in September as they aim to balance the downside risks for the region. As a result, if sales slumps 0.2% or greater from the previous month, we will favor a bearish outlook for the commodity currency, and will implement the same setup for a long dollar-loonie trade as the short positional mentioned above, just in reverse.

TTN 10-07-20_1

Impact that Canada Retail Sales has had on CAD during the last month

TTN 10-07-20_2

April 2010 Canada Retail Sales

Retail spending in Canada slumped 2.0% in April amid forecasts for a 0.4% decline, while sales excluding autos contracted 1.2% versus expectations for a flat reading, and the weakness in private consumption could lead the Bank of Canada to maintain a cautious outlook for the region as the marked rebound in economic activity tapers off. The breakdown of the report showed discretionary spending on clothing slumped 5.2% from the previous month, with demands for motor vehicles and parts falling 4.8%, while electronics and appliances sales increased 0.6% in April. Nevertheless, as the BoC lifts the benchmark interest rate off the record-low of 0.25%, the central bank may normalize policy further over the coming months as it expects inflation to exceed the 2% target next year, and market participants may raise speculation for another rate hike in July as the economy continues to emerge from the recession. TTN 10-07-20_3

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.
00001_CAD 00002_CAD

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

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