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USD/CAD- Trading Canada’s Consumer Price Report

USD/CAD- Trading Canada’s Consumer Price Report

David Song, Strategist

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 02/22/2013 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.6%

Previous: 0.8%

DailyFX Forecast: 0.6% to 0.8%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to expand an annualized 0.6% in January, which would mark the slowest pace of growth since October 2009, and easing price pressures should drag on the loonie as it dampens the Bank of Canada’s (BoC) scope to normalize monetary policy. Indeed, we’ve seen BoC Governor Mark Carney talk down bets for a rate hike in light of the recent lull in the real economy, and the central bank may stick to the sidelines throughout 2013 in order to encourage a stronger recovery.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (JAN)

53.9

58.9

Gross Domestic Product (MoM) (NOV)

0.2%

0.3%

Retail Sales (MoM) (NOV)

0.0%

0.2%

The Downside

Release

Expected

Actual

Net Change in Employment (JAN)

5.0K

-21.9K

Industrial Product Price (MoM) (DEC)

0.0%

0.0%

Raw Materials Price Index (MoM) (DEC)

0.3%

-2.0%

The pickup in business spending along with the rebound in retail sales may limit the downside risk for price growth, and a stronger-than-expected inflation print may prop up the Canadian dollar as it raises the prospects for higher interest rates. However, businesses may continue to conduct discounts amid easing input costs paired with the recent slowdown in private sector activity, and we may see the BoC preserve an accommodative policy stance this year in an effort to limit the downside risks for growth and inflation.

Potential Price Targets For The Release

Forex_USDCAD-_Trading_Canadas_Consumer_Price_Report_body_ScreenShot005.png, USD/CAD- Trading Canada’s Consumer Price Report

As the relative strength index on the USDCAD pushes into overbought territory, the pair looks poised for a short-term correction, but we may see the pair make a move towards the 1.0300 figure should the inflation report further dampen bets for a rate hike. Nevertheless, a positive development may serve as the fundamental catalyst to spark a near-term reversal in the exchange rate, but we will to keep a close eye on the RSI as it maintains the upward trend carried over from the end of 2012.

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 consumer price report tops market forecast, we will need to see 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 place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish 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 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 implement the same setup 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)

DEC 2012

1/25/2013 13:30 GMT

1.2%

0.8%

+3

-9

December 2012 Canada Consumer Price Index

Forex_USDCAD-_Trading_Canadas_Consumer_Price_Report_body_ScreenShot004.png, USD/CAD- Trading Canada’s Consumer Price Report

Price growth unexpectedly held steady at 0.8% in December to mark the slowest pace of growth since October 2009, while the core rate of inflation slipped to 1.1% from 1.2% the month prior. Indeed, the Canadian dollar struggled to hold its ground following the report, with the USDCAD climbing back above the 1.0075 figure, but the loonie firmed up during the North American trade as the pair ended the day at 1.0058.

--- 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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