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Will Higher Canadian Inflation Halt the USDCAD Rally?

Will Higher Canadian Inflation Halt the USDCAD Rally?

David Song, Strategist

Trading the News: Canada Consumer Price Index

Another pickup in the headline reading for Canadian inflation may produce a near-term correction in the USDCAD should the data heighten speculation for higher borrowing costs.

What’s Expected:

Time of release: 08/23/2012 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 1.4%

Previous: 1.2%

DailyFX Forecast: 1.2% to 1.4%

Why Is This Event Important:

A faster rate of inflation may encourage the Bank of Canada (BoC) to adopt a more hawkish tone for monetary policy, and we may see the Canadian dollar benefit from a shift in the policy outlook as Governor Stephen Poloz keeps the door open to deliver a rate hike over the coming months.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Average Weekly Earnings (YoY) (MAY)

--

2.5%

Industrial Product Price (MoM) (JUN)

0.2%

0.3%

Quarterly Gross Domestic Product (Annualized) (1Q)

2.3%

2.5%

Firms in Canada may pass on higher costs onto consumers amid the pickup in wage growth, and a strong inflation print may prompt the USDCAD to pare the sharp rally from earlier this week as it raises the scope of seeing a BoC rate hike.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (JUN)

-0.4%

-0.6%

Wholesale Trade Sales (MoM) (JUN)

-0.5%

-2.8%

Net Change in Employment (JUL)

10.0K

-39.4K

Nevertheless, businesses may continue to offer heavy discounts amid the slowdown in private consumption, and the Canadian dollar may continue to lose ground against its U.S. counterpart should price growth undershoot market expectations.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Canada CPI grows 1.4% or greater

  • Need red, five-minute candle after the report to consider short USDCAD entry
  • If the market reaction favors a sell trade, establish short with two position
  • Set stop at the near-by swing high/reasonable distance from cost; use at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bearish CAD Trade: Inflation falls short of market forecast

  • Need green, five-minute candle for the release to look at a long USDCAD trade
  • Carry out the same setup as the bullish CAD trade, just in the opposite direction

Potential Price Targets For The Release

Forex_Will_Higher_Canadian_Inflation_Halt_the_USDCAD_Rally_body_ScreenShot344.png, Will Higher Canadian Inflation Halt the USDCAD Rally?
  • Upward trending channel continues to favor topside targets
  • Looking for a higher high as it carves a higher low in August
  • Soft resistance at 1.0540-50, 100% Fibonacci expansion
  • Keep a close eye on the Relative Strength Index as it comes up against overbought territory
  • Former resistance (1.0420-30, 38.2% retracement) should serves as new support

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 2013

07/19/2013 12:30 GMT

1.2%

1.2%

+20

-3

June 2013 Canada Consumer Price Index

Forex_Will_Higher_Canadian_Inflation_Halt_the_USDCAD_Rally_body_ScreenShot343.png, Will Higher Canadian Inflation Halt the USDCAD Rally?

Price growth in Canada climbed an annualized 1.2% in June to mark the fastest pace of growth since October, while the core rate of inflation increased 1.3% following the 1.1% rise the month prior. Despite the higher-than-expected print, the USDCAD pushed above the 1.0380 region as the rise in inflation was largely driven by higher energy prices, but the market reaction was short-lived as the pair ended the day at 1.0362.

--- 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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