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EURCAD: Trading Canada’s Consumer Price Report

EURCAD: Trading Canada’s Consumer Price Report

David Song, Strategist

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 04/20/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: EURCAD

Expected: 2.0%

Previous: 2.6%

DailyFX Forecast: 1.8% to 2.2%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to fall back to 2.0% in March and a soft consumer price report could drag on the loonie as it dampens expectations for a rate hike. Indeed, the Bank of Canada scaled back its dovish tone for monetary policy as the economic recovery gathers pace, but we may see the central bank preserve its wait-and-see approach throughout 2012 on the back of easing price pressures.

Recent Economic Developments

The Upside

Release

Expected

Actual

Business Outlook Future Sales (1Q)

--

35.00

Net Change in Employment (MAR)

10.5K

82.3K

Unemployment Rate (MAR)

7.4%

7.2%

The Downside

Release

Expected

Actual

Manufacturing Sales (FED) (JAN)

-0.3%

-0.3%

Retail Sales (MoM) (JAN)

1.8%

0.5%

Wholesale Sales (MoM) (JAN)

0.3%

-1.0%

As businesses sentiment improves, firms may pass on higher costs onto consumer amid the ongoing improvement in the labor market, and an above-forecast print may lead the EURCAD to give back the advance from earlier this week as market participants increase bets for higher borrowing costs. However, the slowdown in private sector consumption may encourage businesses to keep a lid on consumer prices and a dismal CPI report could trigger a sharp selloff in the loonie as market participants scale back bets for a rate hike. In turn, the short-term rebound in the EURCAD may gather pace over the next 24-hours of trading, and we may see the pair continue to retrace the decline from earlier this month as the pair appears to be carving a major bottom in 2012.

Potential Price Targets For The Release

EURCAD_Trading_Canadas_Consumer_Price_Report_body_04.png, EURCAD: Trading Canada’s Consumer Price Report

A look at the encompassing structure sees the EURCAD continuing to consolidate into the apex of a wedge formation with the exchange rate now testing daily resistance at the 23.6% Fibonacci extension taken from the September 19th and January 17th troughs at 1.3050. A breach above this level eyes daily resistance at the 50-day moving average at 1.3136 backed by the 38.2% extension at 1.3165. Note that RSI broke below trendline support dating back to January with oscillator now attempting break back above. We will reserve a new trendline support dating back to the March lows as our downside trigger which if compromised negates our medium-term bullish bias.

EURCAD_Trading_Canadas_Consumer_Price_Report_body_04_1.png, EURCAD: Trading Canada’s Consumer Price Report

Our 30min scalp chart shows the EURCAD attempting to break above interim resistance at the 23.6% Fibonacci extension taken form the March 14th and April 5th troughs at 1.3050. Clear RSI bullish divergence suggests further topside moves are likely with subsequent targets eyed at 1.3080, the 38.2% extension at 1.3113 and 1.3140. Note that the 50% extension at 1.3165 coincides with the 38.2% extension taken on our daily chart and if breached offers further conviction on our directional bias. Interim support rests at 1.3005 backed by 1.2970 and 1.2945. A break below this level eyes the 2012-low at 1.2870 backed by the 2011 lows at 1.2770. Should the data prompt a bearish loonie response look to target topside levels with our bias weighted to the topside so long as the monthly low at 1.2933 is respected.

How To Trade This Event Risk

Forecasts for a slower rate of inflation casts a bearish outlook for the loonie, but an above-forecast print could pave the way for a long Canadian dollar trade as investors see the BoC gradually withdrawing monetary support. Therefore, if the CPI tops market expectations, we will need to see a red, five-minute candle following the report to establish a sell entry on two-lots of EURCAD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate 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 hits its target in order to lock-in our winnings.

However, as private sector consumption wanes, businesses may dampen prices in an effort to draw demands, and a soft inflation report could spark a selloff in the Canadian dollar as it curbs speculation for higher interest rates. As a result, if the headline reading falls back to 2.0% or lower, we will implement the same strategy for a long euro-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)

FEB 2012

3/23/2012 11:00 GMT

2.7%

2.6%

+9

-23

February 2012 Canada Consumer Price Index

EURCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot057.png, EURCAD: Trading Canada’s Consumer Price Report

Consumer prices in Canada increased at an annualized pace of 2.6% after expanding 2.5% in January, while the core rate of inflation climbed 2.3% to mark the fastest pace of growth since July 2007. Indeed, the EURCAD tipped higher following the release as the headline reading fell short of market expectations, but the Canadian dollar regained its footing during the North American trade, with the pair ending the session at 1.3233.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

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

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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

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