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Forex: USD/CAD- Trading Canada’s Consumer Price Report

Forex: USD/CAD- Trading Canada’s Consumer Price Report

David Song, Strategist

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 11/23/2012 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 1.1%

Previous: 1.2%

DailyFX Forecast: 1.0% to 1.2%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to expand 1.1% in October, which would mark the slowest pace of growth since June 2010, and easing price pressures may keep the Bank of Canada (BoC) on the sidelines as Governor Mark Carney sees a diminishing threat for an asset bubble. As the record rise in household indebtedness tapers off, we should see the BoC endorse a more neutral tone for 2013, and the shift in central bank rhetoric should further weaken the Canadian dollar as market participants scale back bets for a rate hike.

Recent Economic Developments

The Upside

Release

Expected

Actual

Manufacturing Sales (MoM) (SEP)

0.3%

0.4%

Raw Materials Price Index (MoM) (SEP)

1.1%

1.3%

Retail Sales (MoM) (AUG)

0.3%

0.3%

The Downside

Release

Expected

Actual

Net Chance in Employment (OCT)

10.0K

1.8K

Gross Domestic Product (MoM) (AUG)

0.2%

-0.1%

Building Permits (MoM) (SEP)

-3.0%

-13.2%

The resilience in private sector spending paired with rising input costs may encourage businesses to prop up consumer prices, and a unexpected uptick in the CPI may heighten the appeal of the Canadian dollar as it raises the scope for a rate hike. However, as job growth tapers off, with economic activity contracting in August, the slowing recovery may continue to drag on inflation, and easing price pressures may encourage BoC Governor Mark Carney to preserve a neutral policy stance over the near to medium-term in an effort to shield the economy from external shocks.

Potential Price Targets For The Release

Forex_USDCAD-_Trading_Canadas_Consumer_Price_Report_body_ScreenShot071.png, Forex: USD/CAD- Trading Canada’s Consumer Price Report

As the USDCAD bounces off of trendline support, we may see the bullish trend continue to shape ahead of December, the bullish pattern from September may continue to take shape, and we may see the pair make another run at the 50.0% Fibonacci retracement from the 2011 low to high around 1.0030 should the data dampen expectations for a rate hike. However, as the relative strength index fails to maintain the upward trend, the break in the oscillator may foreshadow further declines in the exchange rate, and a higher-than-expected CPI print may threaten the rebound from 0.9632 as it raises the BoC’s scope to normalize monetary policy.

How To Trade This Event Risk

Expectations for a softer CPI print encourages a bearish outlook for the loonie, but sticky price growth may pave the way for a long Canadian dollar trade as it reignites bets for a rate hike. Therefore, if the inflation report tops market forecast, 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 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 cost once the first trade hits its mark in order to preserve our winnings.

However, we may see the slowing recovery may continue to bear down on inflation, and a dismal print may trigger a bearish reaction in the Canadian dollar as market participants scale back bets for higher borrowing costs. As a result, if the CPI disappoints, we will carry out 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)

SEP 2012

10/19/2012 12:30 GMT

1.3%

1.2%

-2

+36

September 2012 Canada Consumer Price Index

Forex_USDCAD-_Trading_Canadas_Consumer_Price_Report_body_ScreenShot070.png, Forex: USD/CAD- Trading Canada’s Consumer Price Report

Price growth unexpectedly held steady at 1.2% for the second consecutive month in September, while the core rate of inflation tumbled to an annualized 1.3% to mark the slowest pace of growth since June 2011. Despite the delayed reaction, the loonie struggled to hold its ground throughout the North American trade, with the USDCAD ended the day at 0.9931.

--- 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, please follow this link.

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