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USDCAD: Trading Canada’s Retail Sales Report

USDCAD: Trading Canada’s Retail Sales Report

David Song, Strategist

Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 08/22/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 0.1%

Previous: 0.2%

DailyFX Forecast: -0.2% to 0.1%

Why Is This Event Important:

Household spending in Canada is expected to increase another 0.1% after expanding 0.2% during May, and the ongoing rise in private sector consumption may prop up the Canadian dollar as it raises the scope for a rate hike. Indeed, Bank of Canada Governor Mark Carney has persistently talked up speculation for higher borrowing costs as the economy continues to ‘grow above trend,’ but a dismal print may encourage the central bank to endorse a wait-and-see approach throughout the remainder of the year as the slowing recovery in the U.S. – Canada’s largest trading partner – dampens the outlook for growth.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Price Index (YoY) (JUL)

1.5%

1.3%

Ivey Purchasing Manager Index s.a. (JUL)

52.0

62.8

Raw Material Price Index (MoM) (JUN)

-3.0%

-4.0%

The Downside

Release

Expected

Actual

Manufacturing Sales (MoM) (JUN)

0.3%

-0.4%

Net Change in Employment (JUL)

6.0K

-30.4K

Gross Domestic Product (MoM) (MAY)

0.2%

0.1%

Easing prices pressures in Canada may help to produce a better-than-expected retail sales report, and a large uptick in private sector consumption may instill a bullish outlook for the loonie as market participants increase bets for a BoC rate hike. However, the recent downturn in employment paired with the ongoing slack within the real economy may continue to sap household spending, and a slowdown in sales may fuel a sharp reversal in the USDCAD as it limits the central bank’s scope to normalize monetary policy.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot111.png, USDCAD: Trading Canada’s Retail Sales Report

As retail spending is expected to increase for the second consecutive month in June, we may see the USDCAD continue to retrace the rebound from April (0.9799), and we may see currency traders become increasingly bullish on the loonie as the BoC continues to talk up speculation for a rate hike. However, as the relative strength index comes off of oversold territory, a dismal print may spark a short-term reversal in the exchange rate, and the dollar-loonie may build a short-term base in August should the development curb bets for higher borrowing costs.

How To Trade This Event Risk

Expectations for a second consecutive rise in retail sales certainly casts a bullish outlook for the loonie, and the , market reaction may pave the way for a long Canadian dollar trade as the data heightens speculation for a rate hike. Therefore, if household spending increases 0.1% or greater in June, 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 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 hits its mark in an effort to lock-in our gains.

However, slowing inflation paired with the recent weakness in the labor market may drag on private sector consumption, and we may see a marked slowdown in household spending as the recovery appears to be tapering off. As a result, if the sales report 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 Retail Sales 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 2011

7/23/2012 12:30 GMT

0.5%

0.3%

+26

-50

May 2012 Canada Retail Sales

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot106.png, USDCAD: Trading Canada’s Retail Sales Report

Retail sales increased 0.3% in May after contracting a revised 0.6% the month prior, led by a 1.4% decline in gasoline receipts, while demands for motor vehicle and parts slipped 0.4% during the same period. Indeed, the Canadian dollar weakened following the report, with the USDCAD climbing back to the 1.0200 figure, but the reaction was short-lived as the pair ended the day 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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