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USD/CAD to Face Fresh December Highs on Dismal Canada CPI

USD/CAD to Face Fresh December Highs on Dismal Canada CPI

2014-12-19 08:00:00
David Song, Shuyang Ren,
Share:

- Canada Consumer Price Index (CPI) to Hold Above 2% Target for Eighth Consecutive Month.

- Core Inflation to Climb Annualized 2.5% to Mark the Fastest Pace of Growth Since February 2012.

Trading the News: Canada Consumer Price Index (CPI)

A slowdown in Canada’s Consumer Price Index (CPI) may spur fresh monthly highs in USD/CAD especially as the Bank of Canada (BoC) remains reluctant to further normalize monetary policy.

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What’s Expected:

USD/CAD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

However, another uptick in the core rate of inflation may heighten the appeal of the loonie as sticky price growth undermines the BoC’s scope to retain the current policy, and Governor Stephen Poloz may sound increasingly hawkish in 2015 as the central bank head highlights the broadening recovery in the Canadian economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (NOV)

--

0.0%

Industrial Product Price (MoM) (OCT)

-0.4%

-0.5%

Raw Materials Price Index (MoM) (OCT)

-2.5%

-4.3%

Lower input costs paired with the slowdown in the housing market may trigger a sharp slowdown in price growth, and a dismal CPI print may heighten the bearish sentiment surrounding the Canadian dollar as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product (Annualized) (3Q)

2.1%

2.8%

Retail Sales (MoM) (SEP)

0.5%

0.8%

Ivey Purchasing Managers Index s.a. (NOV)

52.5

56.9

However, the pickup in economic activity along with the expansion in private sector consumption may produce a stronger-than-expected inflation report, and sticky price pressures may generate a near-term pullback in USD/CAD as it fuels bets for a BoC rate hike.

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 Miss Market Forecast

  • 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: Canada CPI Highlights Stronger Price Pressures

  • 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

  • USD/CAD may have carved a near-term top in December as the RSI quickly turns around from overbought territory.
  • Interim Resistance: 1.1700 pivot to 1.1715 (100% expansion)
  • Interim Support: 1.1470 (50% expansion) to 1.1480 (38.2% expansion)

Read More:

Price & Time: Important Timing Relationship Beckons USD/JPY

USD/CHF Threatens Long-Term Bearish Trend on Negative SNB Rate

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)

OCT

2014

11/21/2014 12:30 GMT

2.1%

2.4%

-27

-29

October 2014 Canada Consumer Price Index (CPI)

USD/CAD Chart

Canada’s Consumer Price Index (CPI) unexpectedly jumped to an annualized rate of 2.4% in October from 2.0% the month prior, while the core rate of inflation increased 2.1% to mark the highest reading since March 2012. Even though price growth holds above the Bank of Canada’s (BoC) 2% inflation target for the seventh consecutive months, it seems the central bank remains in no rush to further normalize monetary policy amid the weakening outlook for global growth paired with the decline in energy prices. The loonie strengthened against its U.S. counterpart following the better-than-expected print, with USD/CAD dipping below the 1.1200 handle following the release. However, the market reaction was short-lived as dollar-loonie worked its way back towards 1.1250 during the North America trade, with the pair closing the day at 1.1290.

--- 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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