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USD/CAD: Trading Canada’s Consumer Price Report

USD/CAD: Trading Canada’s Consumer Price Report

2011-12-19 21:21:00
David Song, Currency Strategist
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Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 12/20/2011 12:00 GMT, 7:00 EST

Primary Pair Impact:USDCAD

Expected: 2.9%

Previous: 2.9%

DailyFX Forecast: 2.7% to 2.9%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to hold steady at an annual rate of 2.9% in November, and the stickiness in price growth could spark a bullish reaction in the loonie as the development dampens expectations for a rate cut. As the Bank of Canada carries it wait-and-see approach into the following year, above-target inflation is likely to keep the central bank on the sidelines throughout 2012, and we may see Governor Mark Carney talk down speculation for lower borrowing costs as the board aims to balance the risks for the region. However, as the slowing recovery in Canada dampens the outlook for inflation, the BoC may sound increasingly dovish over the coming months, and the central bank may revert back to its easing cycle in order to encourage a more robust recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (NOV)

55.5

59.9

Quarterly Gross Domestic Product (Annualized) (3Q)

3.0%

3.5%

Retail Sales (MoM) (SEP)

0.5%

1.0%

The Downside

Release

Expected

Actual

International Merchandise Trade (OCT)

0.70B

-0.89B

Industrial Product Price (MoM) (OCT)

0.3%

-0.1%

Raw Materials Price Index (MoM) (OCT)

1.0%

-1.2%

The pickup in growth paired with the expansion in private sector consumption may encourage businesses to ramp up consumer prices, and an above-forecast print could lead the USD/CAD to give back the rebound from the monthly low (1.0051) as market participants scale back bets for a rate cut. However, easing input costs paired with the slowdown in global trade may encourage firms to keep a lid on prices, and a soft inflation report could open the door for lower borrowing costs as the BoC aims to balance the risks for the region. In turn, we may see the dollar-loonie make a run at the November high (1.0523), and the exchange rate may push higher in 2012 as the pair maintains the upward trend from back in July.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot010.png, USD/CAD: Trading Canada’s Consumer Price Report

How To Trade This Event Risk

As the stickiness in price growth dampens the prospects for lower borrowing costs, the inflation report could pave the way for a long Canadian dollar trade, and we may see the loonie recoup the losses from earlier this month as market participants see the BoC maintaining its current policy throughout 2012. Therefore, if the CPI hold steady at 2.9% or unexpectedly increases from the previous month, 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.

On the other hand, we may see businesses keep a lid on prices in order to draw domestic demands, and a soft inflation report is likely to bear down on the exchange rate as market participants raise bets for a rate cut. As a result, if consumer prices expand at a slower pace in November, we will implement the same strategy 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)

OCT 2011

11/18/2011 12:00 GMT

2.8%

2.9%

-29

+26

October 2011 Canada Consumer Price Index

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot009.png, USD/CAD: Trading Canada’s Consumer Price Report

Consumer prices in Canada increased an annualized 2.9% in October after expanding 3.2% in the previous month, while the core rate of inflation advanced 2.1% following the 2.2% rise in September. The breakdown of the report showed a 0.6% drop in gasoline prices, with the cost of food falling another 0.2% after contracting 0.5% in the previous month, while prices for clothing and shoes increased 1.2% following the 4.9% expansion in September. The stickiness in price growth will certainly limit the Bank of Canada’s scope to lower the benchmark interest rate from 1.00% even as the region faces a slowing recovery, and we are likely to see Governor Mark Carney endorse a wait-and-see approach in the following year as the central bank sees the economy operating below full-capacity until the end of 2012. The higher-than-expected print propped up the Canadian dollar, with the USD/CAD falling back to 1.0200, but the initial reaction was short-lived as the pair ended the day at 1.0271.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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