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USD/CAD: Trading the Canadian Retail Sales Report

USD/CAD: Trading the Canadian Retail Sales Report

2011-09-21 20:36:00
David Song, Currency Strategist
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Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 09/22/201112:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: -0.3%

Previous: 0.7%

DailyFX Forecast: -0.5% to 0.2%

Why Is This Event Important:

Household spending in Canada is expected to fall 0.3% in July, and the downturn in private sector consumption is likely to weigh on the exchange rate as it dampens the outlook for future growth. The slowdown in economic activity may encourage the Bank of Canada to keep the benchmark interest rate on hold throughout the remainder of the year, and we may see central bank Governor Mark Carne maintain his pledge to ‘carefully consider’ future rate hikes as ‘the need to withdraw monetary policy stimulus has diminished.’ However, an unexpected rise in retail sales could increase the argument for higher borrowing costs, and the BoC may show an increased willingness to normalize monetary policy further as the central bank expects economic activity to pick up throughout the second-half of the year.

Recent Economic Developments

The Upside

Release

Expected

Actual

Wholesale Sales (MoM) (JUL)

0.7%

0.8%

Manufacturing Sales (MoM) (JUL)

1.4%

2.7%

Ivey Purchasing Manager Index s.a. (AUG)

52.3

56.4

The Downside

Release

Expected

Actual

Consumer Price Index (YoY) (AUG)

2.9%

3.1%

Net Change in Employment (AUG)

21.5K

-5.5K

Gross Domestic Product (Annualized) (2Q)

0.0%

-0.4%

The ongoing expansion in private sector consumption certainly bodes well for retail spending, and an upbeat sales report may help the Canadian dollar to recoup the losses from earlier this week as growth prospects improve. However, the drop in employment paired with the higher rate of inflation may impede on household spending, and a drop in consumption may fuel the bearish sentiment underlying the loonie as interest rate expectations falter. In turn, the USD/CAD may threaten the downward trend carried over from back in 2009, and the exchange rate may recoup the losses from the previous year as the fundamental outlook for Canada deteriorates.

Potential Price Targets For The Release

USDCAD_Trading_the_Canadian_Retail_Sales_Report__body_ScreenShot107.png, USD/CAD: Trading the Canadian Retail Sales Report

How To Trade This Event Risk

Projections for a weak sales report certainly instills a bearish outlook for the loonie, but an unexpected rise in spending could pave the way for a long Canadian dollar trade as growth wanes. As a result, if consumption increases from the previous month, we will need to see a red, five-minute candle subsequent to the release in order to generate a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, 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 cost once the first trade reaches its mark in an effort to preserve our profits.

In contrast, the drop in GDP paired with the slowdown in employment is likely to bear down on private sector consumption, and a dismal sales report is likely to weigh on the exchange rate as it dampens the outlook for future growth. As a result, if spending falls by 0.3% or greater in July, we will implement the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Impact that the Canada Retail Sales 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

8/23/2011 12:30 GMT

0.7%

0.7%

+13

+3

June 2011 Canada Retail Sales

Retail spending in Canada increased 0.7% in June after rising a revised 0.3% in the previous month, while sales excluding autos slipped 0.1% amid forecasts for a 0.1% expansion. The breakdown of the report showed discretionary spending on clothing held flat from the previous month, with demands for electronics and appliances falling 3.0%, while spending on motor vehicle and parts advanced 3.4% during the same period. Indeed, the ongoing expansion in private sector consumption highlights an improved outlook for the region, but we may see the Bank of Canada maintain a wait-and-see approach throughout the remainder of the year as the region faces a slowing recovery. As BoC Governor Mark Carney maintains his pledge to ‘carefully consider’ future rate hikes, the central bank looks as though it will keep the interest rate at 1.00% as the fundamental outlook for the region wavers. The initial reaction to the report was short-lived, with the USD/CAD bouncing back from 0.9853, but the Canadian dollar recoup the losses during the North American trade as the exchange rate settled at 0.9871 at the end of the day.

USDCAD_Trading_the_Canadian_Retail_Sales_Report__body_ScreenShot106.png, USD/CAD: Trading the Canadian Retail Sales Report

Questions? Comments? Join us in the DailyFX Forum

Join Junior Currency Analyst Christopher Vecchio 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

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