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USD/CAD to Eye Fresh Highs on Marked Slowdown in Canada CPI

USD/CAD to Eye Fresh Highs on Marked Slowdown in Canada CPI

2014-10-17 07:00:00
David Song, Shuyang Ren,
Share:

- Canada Consumer Price Index (CPI) to Slow After Holding at 2.1% for Last Two-Months.

- Core Inflation to Retain the Fastest Pace of Growth Since April 2012.

Trading the News: Canada Consumer Price Index (CPI)

A slowdown in Canada’s Consumer Price Index (CPI) may generate a further advance in USD/CAD as it gives the Bank of Canada (BoC) greater scope to retain its current policy throughout the remainder of 2014.

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What’s Expected:

USD/CAD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

However, the stickiness in core inflation may heighten the appeal of the loonie as it puts increased pressure on central bank Governor Stephen Poloz to adopt a more hawkish tone for monetary policy, and the USD/CAD may face a larger pullback ahead of the October 22 policy meeting should the report boost interest rate expectations.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Raw Materials Price Index (MoM) (AUG)

-1.5%

-2.2%

Gross Domestic Product (MoM) (JUL)

0.3%

0.0%

Retail Sales (MoM) (JUL)

0.5%

-0.1%

Easing input costs along with the slowdown in private consumption may generate a marked slowdown in price growth, and a dismal CPI print may generate fresh monthly highs in USD/CAD as market participants scale back bets for higher borrowing costs.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Business Outlook Future Sales (3Q)

28.00

35.00

New Housing Price Index (YoY) (AUG)

1.5%

1.5%

Average Weekly Earnings (YoY) (JUL)

--

3.3%

However, higher wage growth paired with expectations for a faster recovery may boost price pressures in Canada, and a strong inflation reading should spur a bullish reaction in the Canadian dollar as it raises the BoC’s scope to further normalize monetary policy.

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

How To Trade This Event Risk(Video)

Bearish CAD Trade: Headline & Core Inflation Slows in September

  • Need green, five-minute candle following a dismal CPI report to consider long USD/CAD entry
  • If the market reaction favors a bearish 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: Consumer Price Report Tops Market Expectations

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

Potential Price Targets For The Release

USD/CAD Daily Chart

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: 1.1380 (78.6% expansion) to 1.1400 Pivot
  • Interim Support: 1.0830 (61.8% retracement) to 1.0850 (38.2% retracement)

Read More:

Price & Time: To Bounce, Or Not To Bounce - That Is The Question

Dollar: Market No Longer Expects a 2015 Rate Hike

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)

AUG

2014

09/19/2014 12:30 GMT

2.1%

2.1%

-58

-20

August 2014 Canada Consumer Price Index (CPI)

USD/CAD to Eye Fresh Highs on Marked Slowdown in Canada CPI

Canada’s Consumer Price Index (CPI) held steady at an annualized rate of 2.1% in August, while the core CPI unexpectedly increased to 2.1% from 1.7% in July, marking the highest reading since May 2012. Though the rise in core inflation may put increased pressure on the Bank of Canada (BoC) to raise the benchmark interest rate, it seems as though the central bank will retain its neutral tone for some time as the fundamental outlook remains clouded by the weakness in global growth. The better-than-expected core inflation print propped up the Canadian dollar, with the USD/CAD dipping below 1.0900 following the release, but the loonie struggled to hold the gains during the North America trade as it closed at 1.0957.

--- 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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