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USD/CAD at Risk for Larger Downside Correction on Sticky Canada CPI

USD/CAD at Risk for Larger Downside Correction on Sticky Canada CPI

2014-09-19 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)

The USD/CAD may face a larger decline over the next 24-hours trading should Canada’s Consumer Price Index (CPI) raise the Bank of Canada’s (BoC) scope to further normalize monetary policy.

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What’s Expected:

USD/CAD CPI

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Why Is This Event Important:

Sticky inflation may put increased pressure on the BoC to raise the benchmark interest rate sooner rather than later, and a strong inflation print may heighten the appeal of the Canadian dollar as central bank Governor Stephen Poloz scales back his dovish tone for monetary policy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Manufacturing Sales (MoM) (JUL)

1.1%

2.5%

Gross Domestic Product (Annualized) (2Q)

2.7%

3.1%

Retail Sales (MoM) (JUN)

0.3%

1.1%

The pickup in household consumption may prompt Canadian firms to boost consumer prices, and an unexpected uptick in the core CPI may instill an improved outlook for the loonie as it boosts interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (AUG)

55.3

50.9

Net Change in Employment (AUG)

10.0K

-11.0K

Industrial Product Price (MoM) (JUL)

-0.2%

-0.3%

However, lower input costs paired with the persistent slack in the real economy may drag on consumer prices, and a dismal print may generate higher-lows in the USD/CAD as it dampens the outlook for higher borrowing costs.

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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: Consumer Price Report Disappoints

  • 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

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Bearish RSI break may undermine inverse head-and-shoulders pattern; will stay constructive as long as USD/CAD holds above the August low (1.0809).
  • Interim Resistance: 1.1100 (23.6% retracement) to 1.1120 (78.6% expansion)
  • Interim Support: 1.0800 (61.8% retracement) to 1.0830 (61.8% retracement)

Read More:

AUDNZD Scalps Targets Key Inflection Range - 1.1020 Critical Support

Dollar Gains Likely versus Yen, but Watch out for Euro and Sterling

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)

JUL

2014

08/22/2014 12:30 GMT

2.2%

2.1%

-17

-21

July 2014 Canada Consumer Price Index (CPI)

USD/CAD Chart

The Canada Consumer Price Index (CPI) cooled to an annualized rate of 2.1% from 2.4% in June to mark the first slowdown since February 2014, led by lower transportation costs. The core rate of inflation also came below the estimate, with the figure slipping to 1.7% from 1.8% during the same period, and we may see the Bank of Canada (BoC) retain a rather neutral tone for monetary policy amid the ongoing slack in the real economy. Despite the weaker-than-expected print, the USDCAD slipped below 1.0940 following the release, with the pair ending the day at 1.0937.

--- 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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