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USD/CAD: Trading the Canadian Consumer Price Report

USD/CAD: Trading the Canadian Consumer Price Report

2011-02-17 21:00:00
David Song, Currency Strategist
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Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 02/18/201112:00 GMT, 7:00 EST

Primary Pair Impact: USDCAD

Expected: 2.4%

Previous: 2.4%

DailyFX Forecast: 2.3% to 2.5%

Why Is This Event Important:

The headline reading for inflation in Canada is expected to hold steady at an annualized 2.4% for the second month in January, and the slowdown in price growth could bear down on the exchange rate as the central bank maintains a neutral outlook for future policy. As the economic outlook for the global economy remains clouded with high uncertainty, subdued price growth would certainly allow the Bank of Canada to keep the benchmark interest rate on hold throughout the first-half of 2011, and investors may curb speculation for higher borrowing costs as the central bank reiterates that future rate hikes will be “carefully considered” going forward. In turn, the report could spark a sharp reversal in the USD/CAD, and the pair should retrace the sharp decline from earlier this week as it comes off the lower bounds of the downward trending channel that was carried over from the previous year.

Recent Economic Developments

The Upside

Release

Expected

Actual

Net Change in Employment (JAN)

15.0K

69.2K

Industrial Produce Price (YoY) (DEC)

0.6%

0.7%

Raw Materials Price Index (MoM) (DEC)

4.0%

4.2%

The Downside

Release

Expected

Actual

Ivey PMI (JAN)

53.2

41.4

New Housing Price Index (MoM) (DEC)

0.2%

0.1%

Manufacturing Sales (MoM) (DEC)

3.0%

0.4%

As the rebound in employment accelerates, with businesses facing higher input costs, firms may increase their willingness to pass on higher costs onto consumers as the economic recovery gathers pace. However, as business spending contracts for the first time in over a year, with private sector demands showing a slower pace of growth, firms may keep a lid on consumer prices in order to drive future sales. The CPI report could certainly set the tone for future price action as investors weigh the prospects for monetary policy, and a slower pace of price growth is likely to curb speculation for higher another round of tightening as the central bank aims to encourage a sustainable recovery.

Potential Price Targets For The Release

USDCAD_Trading_the_Canadian_Consumer_Price_Report_body_ScreenShot019.png, USD/CAD: Trading the Canadian Consumer Price Report

How To Trade This Event Risk

As market participants expect inflation to hold steady in January, the slowdown in price growth certainly reinforces a bearish outlook for the Canadian dollar, but an unexpected rise in the CPI could set the stage for a long loonie trade as investors speculate the central bank to normalize monetary policy further this year. Therefore, if the headline reading for inflation expands at an annual pace of 2.5% or greater, 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 low or a reasonable distance from the entry, and this risk will establish our first 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, businesses may look to absorb the rise in cost as households cope with higher borrowing costs, and subdued inflation could lead the BoC to maintain a wait-and-see approach over the coming months as the economic outlook remains clouded with uncertainties. As a result, if the CPI holds steady at 2.4% or unexpectedly tips lower from the previous month, we will implement the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Impact that the Canadian Consumer Price report has had on CAD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Dec 2010

1/25/2011 12:00 GMT

2.5%

2.4%

+38

+7

December 2010 Canada Consumer Price Index

Consumer prices in Canada grew at an annualized pace of 2.4% in December amid forecasts for a 2.5% expansion, while the core rate of inflation advanced 1.5%, which fell short of expectations for a 1.6% rise. A deeper look at the report showed prices for clothing and shoes tumbled another 3.6% after contracting 3.0% in November, while the cost for food increased 0.5% for the second consecutive month. As the rebound in growth and inflation cools, the Bank of Canada is likely to retain its wait-and-see approach throughout the first quarter of 2011, and the central bank may curb speculation for another round of monetary tightening as it aims to encourage a sustainable recovery. The Canadian dollar tumbled lower following the release, with the USD/CAD advancing to a daily high of 1.0003, but the loonie recouped some of its losses going into the end of the day as the pair closed at 0.9965.

USDCAD_Trading_the_Canadian_Consumer_Price_Report_body_ScreenShot017.png, USD/CAD: Trading the Canadian Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst Michael Wright in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To Give Feedback on the New Layout, Please Send Your Comments or Recommendations to David Song, Currency Analyst: dsong@dailyfx.com

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