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CAD Risks Further Losses on Disinflation Threat- 1.1200 in View

CAD Risks Further Losses on Disinflation Threat- 1.1200 in View

2014-02-21 09:00:00
David Song, Gregory Marks,
Share:

- Canada Consumer Price Index to Increase for Third Consecutive Month

- Headline Inflation of 1.3% Would Match the Highest Reading Seen in 2013

Trading the News: Canada Consumer Price Index

A pick up in Canada Consumer Prices may spur a more meaningful correction in the USDCAD as it limits the threat of seeing the Bank of Canada (BoC) implement a rate cut in 2014.

What’s Expected:

Time of release: 02/21/2014 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 1.3%

Previous: 1.2%

DailyFX Forecast: 1.2% to 1.3%

Why Is This Event Important:

Despite the recent slowdown in economic activity, Governor Stephen Poloz may retain a rather balanced tone for monetary policy should we see a diminishing risk for disinflation, and the BoC may keep the benchmark interest rate on hold this year as central bank officials see a more robust recovery in the U.S. – Canada’s largest trading partner.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

New Housing Price Index (MoM) (DEC)

0.1%

0.1%

Industrial Product Price (MoM) (DEC)

0.3%

0.7%

Average Weekly Earnings (YoY) (NOV)

--

2.5%

Rising input costs along with the uptick in wage growth may spark a further rise in consumer prices, and a higher-than-expected inflation print may spur a more meaningful correction in the USDCAD as it limits the BoC’s scope to implement a rate cut in 2014.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Wholesale Trade Sales (MoM) (DEC)

-0.4%

-1.4%

Existing Home Sales (MoM) (JAN)

--

-3.3%

Manufacturing Sales (MoM) (DEC)

0.0%

-0.9%

However, firms may continue to conduct heavy discounting amid the slowdown in consumption paired with the persistent slack in the real economy, and a dismal CPI print may spur fresh highs in the USDCAD as the BoC shows a greater willingness to revert back to its easing cycle.

How To Trade This Event Risk(Video)

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

Bullish CAD Trade: Headline Inflation Advances 1.3% or Greater

  • Need red, five-minute candle after the CPI report to consider short USDCAD entry
  • If the market reaction favors a long Canadian dollar 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: Canada Consumer Price Report Disappoints

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

Potential Price Targets For The Release

USDCAD Daily

Forex_CAD_Risks_Further_Losses_on_Disinflation_Threat-_1.1200_in_View_body_Picture_2.png, CAD Risks Further Losses on Disinflation Threat- 1.1200 in View

Chart - Created Using FXCM Marketscope 2.0

  • Appears to Have Carved Higher Low Ahead of 1.0900
  • Relative Strength Index Breaks Out of Steep Negative Slope
  • Interim Resistance: 1.1172 Pivot to 1.1230 (50.0% expansion)
  • Interim Support: 1.0900 Pivot to 1.0930 (61.8% expansion)

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)

DEC 2013

01/24/2014 13:30 GMT

-0.1%

-0.2%

-11

-2

December 2013 Canada Consumer Price Index

Forex_CAD_Risks_Further_Losses_on_Disinflation_Threat-_1.1200_in_View_body_Picture_1.png, CAD Risks Further Losses on Disinflation Threat- 1.1200 in View

As was the case during the November print, CPI data out of Canada for the month of December disappointed by a tenth of a percent. Unlike last month where USD/CAD spiked to fresh multi-year highs, price action was missed and the pair ended the day almost flat. It is no surprise that price action slowed after such a large move post-breakout, especially as market participants scaled back positions before the weekly close and FOMC Rate Decision that following Wednesday. As for this print, price action in USD/CAD to the upside over the past 24 hours combined with important time cycles strongly supports a continuation higher if we see weaker than expected CPI figures. On the other hand, a meet or beat of the inflation data could provide for an opportunistic setup to fade Friday lows.

--- Written by David Song, Currency Analyst and Gregory Marks

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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