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USD/CAD: Trading the Canadian Consumer Price Report

USD/CAD: Trading the Canadian Consumer Price Report

2011-08-17 20:44:00
David Song, Strategist
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Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 08/19/2011 11:00 GMT, 7:00 EST

Primary Pair Impact:USDCAD

Expected: 2.8%

Previous: 3.1%

DailyFX Forecast: 2.6% to 3.0%

Why Is This Event Important:

Consumer prices in Canada are projected to increase at an annual pace of 2.8% after expanding 3.1% in June, and the slower rate of inflation is likely to spark a bearish reaction in the loonie as interest rate expectations falter. According to Credit Suisse overnight index swaps, market participants see borrowing costs in Canada falling by more than 25bp in the next 12-months, and we may see Bank of Canada Governor Mark Carney preserve his pledge to ‘carefully consider’ future rate hikes as policy makers curb their outlook for the region. However, an uptick in price growth could put increased pressure on the BoC to normalize monetary policy further, and the central bank may show an increased willingness to lift the benchmark interest rate from 1.00% in an effort to balance the risks for the economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Retail Sales (MoM) (MAY)

-0.3%

0.1%

Wholesale Sales (MoM) (MAY)

0.1%

1.9%

Business Outlook Future Sales (2Q)

18.00

20.00

The Downside

Release

Expected

Actual

International Merchandise Trade (JUN)

-0.80B

-1.60B

Ivey Purchasing Manager Index s.a. (JUL)

61.0

46.8

Gross Domestic Product (MoM) (MAY)

0.1%

-0.3%

The pickup in private sector consumption may encourage businesses to raise prices as they continue to cope with high input costs, and the near-term reversal in the USD/CAD may gather pace should we see a higher rate of inflation spur expectations for a rate hike. However, as businesses scale back on spending, the drop in global trade may drive firms to keep a lid on consumer prices, and price pressures may weaken further over the coming months as companies try to stimulate domestic demands. In turn, we may see the BoC carry its current policy into the following year, and Governor Carney may endorse keep the benchmark interest rate on hold well into 2013 as growth and inflation cool.

Potential Price Targets For The Release

USDCAD_Trading_the_Canadian_Consumer_Price_Report_body_ScreenShot060.png, USD/CAD: Trading the Canadian Consumer Price Report

How To Trade This Event Risk

Forecasts for a slower rate of inflation encourages a bearish outlook for the loonie, but an unexpected rise in consumer prices could set the stage for a long Canadian dollar trade as interest rate expectations resurface. Therefore, if the headline reading tips higher from the previous month, we will need to see a red, five-minute candle following the report to establish a short 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, businesses may keep a lid on consumer prices in an effort to stimulate private sector consumption, and the slowdown in price growth may lead the BoC to retain its current policy stance throughout the remainder of the year as the central bank aims to encourage a sustainable recovery. As a result, if the headline reading for inflation grows less than 2.8%, we will carry out the same setup for a long dollar-loonie trade as the short position laid out above, just in reverse.

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)

JUN 2011

7/22/2011 11:00 GMT

3.6%

3.1%

+36

+20

June 2011 Canada Consumer Price Index

Price growth in Canada cooled to an annualized rate of 3.1% in June after expanding 3.7% in the previous month, while the core rate of inflation increased 1.3% from the previous year to mark the slowest pace of growth since February. A deeper look at the report showed prices for clothing and shoes slumped 3.5% from the previous month, with energy costs falling 2.0%, while prices for food increased another 0.5% after climbing 0.6% in May. Easing price pressures may encourage the Bank of Canada to preserve its wait-and-see approach throughout the remainder of the year, and central bank Governor Mark Carney may continue to reiterate his pledge to ‘carefully consider’ future rate hikes as given the slowdown in growth and inflation. The Canadian dollar lost ground following the report, with the USD/CAD pushing back above 0.9500, but the loonie recouped some of the losses during the North American trade as the pair closed at 0.9484 at the end of the day.

USDCAD_Trading_the_Canadian_Consumer_Price_Report_body_ScreenShot059.png, USD/CAD: Trading the Canadian Consumer Price Report

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst David Song 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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