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Canadian Dollar Risks Further Losses Amid Threat for Deflation

Canadian Dollar Risks Further Losses Amid Threat for Deflation

David Song, Gregory Marks,

- Canada Consumer Price Index to Slip Below 1.0% for First Time Since May

- Core Inflation to Grow 1.2%; Third-Lowest Print for 2013

Trading the News: Canada Consumer Price Index

A further slowdown in Canada’s Consumer Price Index may highlight a bearish outlook for the Canadian dollar as it heightens the threat for deflation.

What’s Expected:

Time of release: 11/22/2013 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.8%

Previous: 1.1%

DailyFX Forecast: 0.6% to 1.0%

Why Is This Event Important:

It seems as though BoC Governor Stephen Poloz no longer sees a need for higher interest rates in light of the slowing recovery, and the central bank may adopt a more dovish tone for monetary policy as growth and inflation remains subdued.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Wholesale Trade Sales (MoM) (SEP)

0.3%

0.2%

Raw Materials Price Index (MoM) (SEP)

-0.5%

-1.5%

Retail Sales (MoM) (AUG)

0.3%

0.2%

Firms in Canada may embark on heavy discounting amid the slowdown in private sector consumption, and a marked slowdown in price growth may prompt the BoC to reinstate its easing cycle in order to encourage a stronger recovery.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Net Change in Employment (OCT)

11.0K

13.2K

Gross Domestic Product (MoM) (AUG)

0.1%

0.3%

Business Outlook Future Sales (3Q)

--

31.00

Nevertheless, the pickup in job growth paired with the rise in business confidence may help to limit the downside for price growth, and a positive development may produce a meaningful correction in the USDCAD as market participants scale back bets for additional monetary support.

Potential Price Targets For The Release

Join DailyFX on Demand to Cover Canada’s Consumer Price Report LIVE

USDCAD Daily

Forex_Canadian_Dollar_Risks_Further_Losses_Amid_Threat_for_Deflation_body_Picture_2.png, Canadian Dollar Risks Further Losses Amid Threat for Deflation

Chart - Created Using FXCM Marketscope 2.0

  • Retains Upward Trending from January; RSI Bullish Since September
  • Interim Resistance: 1.0510 Pivot to 1.0540 (1.0540)
  • Interim Support: 1.0410 Pivot to 1.0430 (38.2% Fibonacci expansion)

How To Trade This Event Risk(Video)

Bearish CAD Trade: Canada Inflation Slows to 0.8% or Lower

  • Need green, five-minute candle after the report to consider long USDCAD entry
  • If the market reaction favors a short Canadian dollar trade, establish long with two position
  • Set stop at the near-by swing low/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

Bullish CAD Trade: Inflation Tops Market Forecast

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

Impact that the Canada Consumer Price report has had on CAD during the last month

Period

Data Released

Survey

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

SEP 2013

10/18/2013 12:30 GMT

1.0%

1.1%

-9

-102

September 2013 Canada Consumer Price Index

Forex_Canadian_Dollar_Risks_Further_Losses_Amid_Threat_for_Deflation_body_Picture_1.png, Canadian Dollar Risks Further Losses Amid Threat for Deflation

CPI data out of Canada showed September price growth at 1.1%, beating estimates of a 1.0% print. The USD/CAD pair weakened heading into the weekly close as pressure mounted on the greenback due to speculation of a delayed Fed taper- a result of the two week long US Government shutdown. The year over year print this time around is estimated to be a dismal 0.8% due to impacts from the shutdown in addition to a decline in fuel prices across the board. Sustained lower crude prices will continue to put pressure on inflation levels and may prompt dovish intervention by the Bank of Canada as the Federal Reserve looks to step back asset purchases over the next few months. Disappointing CPI prints moving forward do not bode well for CAD strength, especially in the context of a BoC that just removed pledges to raise rates in the future.

--- 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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