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USDCAD: Trading Canada’s Consumer Price Report

USDCAD: Trading Canada’s Consumer Price Report

2012-07-19 06:00:00
David Song, Strategist
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Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 07/20/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 1.2%

Previous: 1.7%

DailyFX Forecast: 1.2% to 1.6%

Why Is This Event Important:

Consumer price in Canada are projected to increase an annualized 1.7% after expand 1.2% in May and the faster rate of inflation may spark a bullish reaction in the loonie as the central bank sees scope for rate hike. Indeed, Bank of Canada Governor Mark Carney continues to talk up speculation for higher borrowing costs amid the record-rise in household indebtedness, but there’s little scope of seeing a series of rate hikes from the central bank in light of the slowing recovery in the U.S. – Canada’s largest trading partner. In turn, the BoC may have little choice but to retain its current policy throughout the second-half of the year, but Mr. Carney may continue to highlight the threat of a housing bubble as the central bank struggles to curb the marked rise in private sector credit.

Recent Economic Developments

The Upside

Release

Expected

Actual

Business Outlook Future Sales (2Q)

15.00

15.00

Net Change in Employment (JUN)

5.0K

7.3K

Gross Domestic Product (YoY) (APR)

1.8%

2.0%

The Downside

Release

Expected

Actual

Manufacturing Sales (MoM) (MAY)

0.6%

-0.4%

Ivey Purchasing Manager Index s.a. (JUN)

57.5

49.0

Retail Sales (MoM) (APR)

0.2%

-0.5%

The ongoing improvement in the labor market paired with the rise in private sector activity may encourage businesses to pass on higher costs onto consumers, and a faster rate of price growth may fuel speculation for a rate hike as the BoC aims to address the risks surrounding the region. However, firms may continue to conduct heavy discounts amid the slowdown in private sector consumption, and easing price pressures should curb expectations for higher borrowing costs as inflation holds below the 2% target.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot072.png, USDCAD: Trading Canada’s Consumer Price Report

As the descending channel on the USDCAD continues to take shape, a rebound in the CPI may spark fresh monthly lows in the exchange rate, and we will maintain a bearish outlook for the pair as the relative strength index maintains the downward trend carried over from the previous month. However, as the pair finds trendline support, a softer-than-expected inflation print may spark a sharp rebound in the exchange rate, and we may see the dollar-loonie move back towards the 1.0200 figure as currency traders scale back expectations for a rate hike.

How To Trade This Event Risk

Forecasts for a faster rate of inflation casts a bullish outlook for the loonie, and a rebound in the CPI may pave the way for a long Canadian dollar trade as it raises the scope for a rate hike. Therefore, if the headline reading advances to 1.7% or higher, we will need to see 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 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 mark in an effort to protect our profits.

On the other hand, the recent weakness in private sector consumption paired with the slowdown in the global economy may prompt businesses to pass on discounted prices, and a soft inflation report may drag on the exchange rate as it limits the scope for higher borrowing costs. As a result, if the CPI print misses market expectations, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in the opposite direction.

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)

MAY 2012

6/22/2012 12:30 GMT

1.5%

1.2%

-14

-40

May 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 1.2% in May to mark the slowest rate of growth since November 2009, while core consumer prices increased 1.8% after expanding 2.1% in the previous month. Indeed, the initial reaction was short-lived, with the USDCAD giving back the advance to 1.0299, and the loonie continued to appreciate against its U.S. counterpart as the exchange rate ended the day at 1.0242.

--- 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.

Questions? Comments? Join us in the DailyFX Forum

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

Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

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