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USDCAD: Trading Canada’s Consumer Price Report

USDCAD: Trading Canada’s Consumer Price Report

David Song, Strategist

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 05/18/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 1.9%

Previous: 1.9%

DailyFX Forecast: 1.8% to 1.9%

Why Is This Event Important:

Consumer price in Canada are projected to increase an annualized 1.9% for the second consecutive month in April, and the stickiness in price growth may prop up the Canadian dollar as it raises the scope for rate hike. As the Bank of Canada adopts a hawkish tone for monetary policy, market participants are pricing a 25bp rate hike for the next 12-months according to Credit Suisse overnight index swaps, but a rise in borrowing costs may only be a one-time deal as the central bank tries to address the record-rise in household indebtedness. In turn, we may see the BoC talk down speculation for a series of rate hikes, and the central bank may take additional steps to curb private sector lending as it poses a threat to the recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Net Change in Employment (APR)

10.0K

58.2K

Participation Rate (APR)

--

66.8

Industrial Product Price (MoM) (MAR)

0.0%

0.2%

The Downside

Release

Expected

Actual

Ivey Purchasing Manager Index (APR)

61.0

52.7

Gross Domestic Product (MoM) (FEB)

0.2%

-0.2%

Retail Sales (MoM) (FEB)

0.1%

-0.2%

The ongoing improvement in the labor market paired with higher input prices may encourage firms to raise consumer prices, and an above-forecast print could lead the USDCAD to give back the advance from earlier this month as market participants increase bets for a rate hike. However, firms may keep a lid on price amid the slowdown in private sector consumption paired with the ongoing slack in the real economy, and a soft inflation reading may encourage the BoC to maintain its wait-and-see approach in an effort to generate a sustainable recovery. In turn, we may see the USDCAD continue to retrace the decline from earlier this year, and the exchange rate may threaten the yearly high at 1.0318 as currency traders scale back speculation for higher borrowing costs.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot014.png, USDCAD: Trading Canada’s Consumer Price Report

As the USDCAD breaks out of the range-bound price action from earlier this year, the pair may threaten the 2012 high at 1.0318, but we will be keeping a close eye on the relative strength index as it breaks above 70. As the RSI pushes into overbought territory, the upward trend in the oscillator reinforces a bullish outlook for the pair, and the exchange rate may continue to track higher until the index falls back below 70. In turn, we should see former resistance around parity act as new support, but the bullish sentiment underlining the greenback may gather pace as market participants scale back their appetite for risk.

How To Trade This Event Risk

Expectations for a flat print may ultimately lead to a muted reaction, but a large divergence from market forecast should produce a tradable event as the BoC adopts a hawkish tone for monetary policy. Therefore, if the headline and core reading for inflation tops 1.9%, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of USDCAD. 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 generate our first objective. The second target 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 order to preserve our targets.

In contrast, the slowdown in household spending paired with easing growth prospects may encourage business to keep a cap on consumer prices, and a soft inflation report could pave the way for another short-term rally in the exchange rate as it dampens expectations for higher borrowing costs. As result, if the print falls short of market forecast, 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)

MAR 2012

4/20/2012 12:30 GMT

2.0%

1.9%

+8

+12

March 2012 Canada Consumer Price Index

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot070.png, USDCAD: Trading Canada’s Consumer Price Report

The headline reading for inflation slipped to 1.9% in March to mark the slowest pace of growth since September 2010, while core prices increased 1.9% after expanding 2.3% in the previous month. The Canadian dollar lost ground following the lower-than-expected CPI print, with the USDCAD climbing back above the 0.9925 figure, but we saw the dollar-loonie consolidate throughout the North American trade as the pair ended the day at 0.9920.

--- 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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