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USD/CAD- Trading the Canada Consumer Price Report

USD/CAD- Trading the Canada Consumer Price Report

David Song, Strategist

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 06/21/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 0.9%

Previous: 0.4%

DailyFX Forecast: 0.5% to 0.8%

Why Is This Event Important:

The headline reading for Canadian inflation is expected to increase an annualized 0.9% in May, and the faster rate of price growth may prop up the loonie should the data renew speculation for higher borrowing costs. However, we may see Bank of Canada (BoC) Governor Stephen Poloz retain a wait-and-see approach in the second-half of the year amid the slowing recovery, and the central bank adopt a more neutral tone in the coming months in an effort to further strengthen the real economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Existing Home Sales (MoM) (MAY)

--

3.6%

New Housing Price Index (MoM) (APR)

0.1%

0.2%

Net Change in Employment (MAY)

15.0K

95.0K

The Downside

Release

Expected

Actual

Wholesale Sales (MoM) (APR)

0.3%

0.2%

Retail Sales (MoM) (MAR)

0.1%

0.0%

Raw Materials Price Index (MoM) (APR)

-0.9%

-2.2%

Beyond rising home prices, the marked improvement in the labor market may prompt Canadian firms to ramp up consumer prices, and a stronger-than-expected inflation print may spark a bullish reaction in the loonie as market participants increase bets for a rate hike. However, businesses may continue to embark on heavy discounting amid the slowdown in private sector consumption, and a dismal development may drag on the Canadian dollar as it dampens the fundamental outlook for the region.

Potential Price Targets For The Release

Forex_USDCAD-_Trading_the_Canada_Consumer_Price_Report_body_ScreenShot079.png, USD/CAD- Trading the Canada Consumer Price Report

As Canadian price growth is expected to pick up in May, we may see the USDCAD continue to come off of trendline resistance, and the wedge/triangle formation may continue to take shape in the second-half of the year as the BoC retains a neutral stance for monetary policy. However, should the inflation report disappoint, we may see the upward trending channel from earlier this year foster a bullish breakout in the exchange rate, and the pair may continue to track higher over the coming months amid the deviation in the policy outlook.

How To Trade This Event Risk

Forecasts for a faster rate of inflation instills a bullish outlook for the loonie, and the market reaction 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 expectations, 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 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 gains.

However, the slowing recovery continue to drag on price growth, 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 mentioned 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)

APR 2013

05/17/2013 12:30 GMT

0.6%

0.4%

+8

+8

April 2013 Canada Consumer Price Index

Forex_USDCAD-_Trading_the_Canada_Consumer_Price_Report_body_ScreenShot078.png, USD/CAD- Trading the Canada Consumer Price Report

Consumer prices in Canada increased an annualized 0.4% during the month of April to mark the slowest pace of growth since October 2009, while the core rate of inflation narrowed to 1.1% from 1.4% amid forecasts for a 1.2%. Although we saw a fairly muted reaction in the USDCAD following the release, the Canadian dollar struggled to hold its ground during the North American trade, with the pair ending the day at 1.0276.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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