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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: 08/17/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 1.5%

Previous: 1.5%

DailyFX Forecast: 1.3% to 1.5%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to hold steady at 1.5% in July, and sticky price growth may increase the appeal of the loonie as it raises the scope for a rate hike. As Bank of Canada Governor Mark Carney embarks on a more hawkish tone for monetary policy, a pickup in consumer prices may fuel speculation for a rate hike, and we may see the Canadian dollar continue to appreciate against its U.S. counterpart as the central bank moves away from its easing cycle.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (JUL)

52.0

62.8

New Housing Price Index (YoY) (JUN)

2.3%

2.3%

Business Outlook Future Sales (2Q)

15.00

15.00

The Downside

Release

Expected

Actual

Net Change in Employment (JUL)

6.0K

-30.4K

Gross Domestic Product (MoM) (MAY)

0.2%

0.1%

Retail Sales (MoM) (MAY)

0.5%

0.3%

Indeed, we may see an uptick in consumer prices as Canadian policy makers strike an improved outlook for the region, and a faster rate of inflation may encourage the BoC to lift the benchmark interest rate from 1.00% as Governor Carney sees the economy ‘growing above trend.’ However, the recent weakness in the labor market paired with the slowdown in private sector consumption may prompt businesses to offer discounted prices, and a softer-than-expected CPI report may drag on the exchange rate as it dampens expectations for higher interest rates.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot098.png, USDCAD: Trading Canada’s Consumer Price Report

As the USDCAD fails to maintain the upward trend carried from 2011, a stronger-than-expected CPI print may lead the pair to give back the rebound from April (0.9799), and we will be keeping a close eye on the relative strength index as it dips below 30 for the first time since March 2010. However, should the print fall short of market expectations, we may see a sharp retracement going into the end of the week, and the pair may move back within the downward trending channel carried from June as the recent decline appears to be oversold.

How To Trade This Event Risk

The stickiness in the headline reading for inflation certainly instills a bullish outlook for the loonie, and the market reaction may set the stage for a long Canadian dollar loonie trade as the data fuels speculation for a rate hike. Therefore, if the CPI crosses the wires at 1.5% or higher, we will need a red, five-minute candle following the release to generate 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 establish our first objective. The second target 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 preserve our profits.

On the other hand, the slowdown in private sector consumption paired with the renewed weakness in the labor market may encourage businesses to curb consumer prices in order to draw demands. As a result, if the headline and core rate of inflation miss market expectations, we will carry out 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)

JUN 2012

7/20/2012 12:30 GMT

1.7%

1.5%

+12

+18

June 2012 Canada Consumer Price Index

USDCAD_Trading_Canadas_Consumer_Price_Report_body_ScreenShot094.png, USDCAD: Trading Canada’s Consumer Price Report

Price growth in Canada picked up during June as the headline reading for inflation advanced an annualized 1.5% from the previous year, while the core CPI grew 2.0% during the same period amid forecasts for a 2.3% print. Indeed, the weaker-than-expected inflation report sparked a bearish reaction in the Canadian dollar, with the USDCAD climbing back above the 1.0110 figure, and the loonie continued to lose ground throughout the North American trade as the pair closed at 1.0122.

--- 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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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