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USD/CAD: Trading the Canada Consumer Price Report

USD/CAD: Trading the Canada Consumer Price Report

2011-05-18 20:43:00
David Song, Currency Strategist
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Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 05/20/2011 11:00 GMT, 7:00 EST

Primary Pair Impact:USDCAD

Expected: 3.4%

Previous: 3.3%

DailyFX Forecast: 3.3% to 3.5%

Why Is This Event Important:

The headline reading for Canadian inflation is projected to increase at an annualized pace of 3.4% in April, which would mark the fastest pace of price growth since September 2008. Heightening price pressures should spark a bullish reaction in the Canadian dollar as investors speculate the central bank to normalize monetary policy further this year, and the short-term reversal in the USD/CAD may gather pace heading into the end of May. According to Credit Suisse overnight index swaps, investors see borrowing costs in Canada increasing by nearly 75bp over the next 12-months, and the Bank of Canada could show an increased willingness to raise the benchmark interest rate from 1.00% in order to anchor inflation expectations.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (APR)

65.5

57.8

Industrial Product Price (MAR)

0.7%

0.9%

Raw Materials Price Index (MAR)

2.5%

5.7%

The Downside

Release

Expected

Actual

Wholesale Sales (MoM) (MAR)

1.2%

0.1%

Gross Domestic Product (MoM) (FEB)

0.0%

-0.2%

Retail Sales (FEB)

0.5%

0.4%

As businesses face higher commodity prices, firms may continue to scale back on spending and look to pass on higher costs onto consumers in order to boost profits. However, as privates sector spending remains subdued, businesses may absorb higher costs in order to promote domestic demands, and firms may keep a lid on prices given the ongoing weakness within the real economy. As BoC Governor Mark Carney continues to see a substantial margin of slack in the private sector, the central bank is likely to retain its pledge to carefully consider future rate hikes throughout the first-half of the year, and the board may retain its wait-and-see approach in the third-quarter to promote a sustainable recovery.

Potential Price Targets For The Release

USDCAD_Trading_the_Canada_Consumer_Price_Report_body_ScreenShot012.png, USD/CAD: Trading the Canada Consumer Price Report

How To Trade This Event Risk

Forecasts for a faster pace of inflation certainly encourage a bullish outlook for the loonie, and the market reaction following the report could set the stage for a long Canadian dollar trade as currency traders expect the central bank to normalize monetary policy further this year. Therefore, if price growth expands 3.4% or greater in April, 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 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 order to preserve our profits.

In contrast, firms may keep a lid on prices in order to draw demands, and a slower-than-expected rate of inflation is likely to bear down on the exchange rate as investors scale back speculation for higher borrowing costs in Canada. As a result, if the headline reading for inflation holds flat at 3.3% or unexpectedly falls back from the previous month, we will carry out the same setup for a long dollar-loonie trade as the short position laid out above, just in the opposite direction.

Impact that the Canada 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)

Mar 2011

4/19/2011 11:00 GMT

2.8%

3.3%

-52

-70

March 2011 Canada Consumer Price Index

Consumer prices in Canada increased at an annualized pace of 3.3% in March to mark the fastest pace of growth since September 2008, while the core rate of inflation advanced 1.7% from the previous year amid, exceeding forecasts for a 1.2% expansion. The breakdown of the report showed prices for gasoline surged 6.6% during the month, with the cost for food increasing 1.5%, while prices for clothing and shoes rose another 5.6% after climbing 1.7% in February. Heightening price pressures may encourage the Bank of Canada to normalize monetary policy further as it maintains its dual mandate to ensure price stability while fostering full-employment. However, the central bank may preserve his wait-and-see approach throughout the first-half of the year as Governor Mark Carney expects the substantial margin of slack within the real economy to bear down on inflation. The faster-than-expected rate of inflation sparked a bullish reaction in the Canadian dollar, with the exchange rate falling back to a daily low of 0.9548, but the loonie certainly gave back some if its advances as the exchange rate settled at 0.9560 at the end of the day.

USDCAD_Trading_the_Canada_Consumer_Price_Report_body_ScreenShot009.png, USD/CAD: Trading the Canada Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

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

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

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

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

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