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USD/CAD to Eye Downside Targets on Sticky Canada Core Inflation

USD/CAD to Eye Downside Targets on Sticky Canada Core Inflation

2014-08-22 07:00:00
David Song, Shuyang Ren,
Share:

- Canada Headline Inflation to Hold Above 2.0% for Fifth Consecutive Month.

- Core Consumer Price Index of 1.9% Would Mark Fastest Pace of Growth Since June 2012.

Trading the News: Canada Consumer Price Index (CPI)

Despite expectations for a downtick in Canada’s Consumer Price Index (CPI), the stickiness in core inflation may spur a larger decline in the USD/CAD as it puts increased pressure on the Bank of Canada (BoC) to move away from its neutral policy stance.

What’s Expected:

USD/CAD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though BoC Governor Stephen Poloz talked down the risk for higher interest rates, the growing risk for a prolonged period of above-target inflation may push the central bank to adopt a more hawkish tone for monetary policy in an effort to promote price stability.

For more updates, sign up for David's e-mail distribution list.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Wholesale Trade Sales (MoM) (JUN)

1.0%

1.6%

Manufacturing Sales (MoM) (JUN)

0.4%

0.6%

Retail Sales (MoM) (MAY)

0.6%

0.7%

The pickup in private sector consumption may heighten price pressures in Canada, and a strong inflation print may spur a more meaningful correction in the USD/CAD as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Average Weekly Earnigns (YoY) (MAY)

--

2.6%

BoC Senior Loan Officer Survey (2Q)

--

-12.8

Business Outlook Future Sales (2Q)

30.00

24.00

Nevertheless, slowing wage growth paired with the ongoing weakness in private lending may spur a softer-than-expected CPI print, and a marked slowdown in price growth may trigger a more meaningful run at the 1.1100 handle as it dampens bets for higher interest rates.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Core Inflation Expands 1.9% or Higher

  • Need red, five-minute candle following the CPI report to consider short USD/CAD entry
  • If the market reaction favors a bullish 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: CPI Report Falls Short of Market Forecast

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

For LIVE SSI Updates Ahead of Canada’s Inflation Report, Join DailyFX on Demand

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite bullish break in RSI, downside remains favored given series of lower highs & lows.
  • Interim Resistance: 1.1000 (38.2% retracement) to 1.1020 (23.6% retracement)
  • Interim Support: 1.0820 (61.8% retracement) to 1.0830 (61.8% retracement)

Read More:

Make or Break Time for USDCHF- Rally Vulnerable Sub 9133

Price & Time: NOK Bucks the Trend

Impact that the Canada CPI 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)

JUN

2014

07/18/2014 12:30 GMT

2.3%

2.4%

-25

-31

June 2014 Canada Consumer Price Index (CPI)

USD/CAD Chart

The annualized inflation rate hit a two-year high of 2.4%, beating an average estimate of 2.3%. The core Consumer Price Index (CPI) reading also exceeded market forecast and climbed 1.8% after expanding 1.7% in May. Bank of Canada Governor Stephen Poloz stressed that the faster rate of price growth was mainly due to transitory factors, including energy and import costs, and expects inflation to slow over the next two years as the central bank retains a “neutral” view for monetary policy. The Canadian dollar jumped following the better-than-expected print, with USD/CAD dipping below the 1.0710 handle. After a quick comeback, the pair moved sideways during the rest of the North American trade and closed at 1.0727.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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