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USD/CAD to Threaten Near-Term Resistance on Dismal Canada CPI

USD/CAD to Threaten Near-Term Resistance on Dismal Canada CPI

David Song, Shuyang Ren,

- Canada Consumer Price Index (CPI) to Slip Below 2% Target for First Time Since March 2014.

- Core Inflation to Uptick to Annualized 2.3%- Highest Print for 2014.

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) reverts back to its easing cycle.

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What’s Expected:

USD/CAD CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

After unexpectedly cutting the benchmark interest rate at the January 21 meeting, a marked slowdown in Canada price growth may put increased pressure on the BoC to further reduce borrowing costs, and the Canadian dollar remains at risk of facing more headwinds over the near to medium-term as Governor Stephen Poloz keeps the door open to implement additional monetary support.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Business Outlook Future Sales (4Q)

29.00

8.00

Net Change in Employment (DEC)

15.0K

-4.3K

Raw Materials Price Index (NOV)

-4.7%

-5.8%

Waning business sentiment paired with falling input costs may continue to drag on consumer prices, and a marked slowdown in price growth may fuel bets for another rate cut as the BoC adopts a highly dovish tone for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (DEC)

53.0

55.4

Gross Domestic Product (MoM) (OCT)

0.1%

0.3%

Retail Sales (MoM) (OCT)

-0.3%

0.0%

Nevertheless, the pickup in economic activity may generate a stronger-than-expected CPI print, and an uptick in the core rate of inflation may spur a near-term correction in USD/CAD as the stickiness limits the BoC’s scope to further reduce the benchmark interest rate.

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

How To Trade This Event Risk(Video)

Bearish CAD Trade: Weak CPI Print Drags on Interest Rate Expectations

  • 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: Sticky Core Inflation Dampens Bets for Another Rate Cut

  • 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

USD/CAD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Bullish RSI structure continues to favor the approach to buy-dips in USD/CAD especially as the oscillator pushes deeper into overbought territory.
  • Interim Resistance: 1.2390 (161.8% expansion) to 1.2430 (1.618% expansion)
  • Interim Support: 1.1990 (78.6% expansion) to 1.2000 pivot

Read More:

Price & Time: Regime Change In Gold

GBPAUD Pulling Back Towards Support

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)

NOV

2014

12/19/2014 13:30 GMT

2.2%

2.0%

-2

+1

November 2014 Canada Consumer Price Index (CPI)

USD/CAD Chart

Canada’s Consumer Price Index (CPI) slowed to an annualized rate of 2.0% in November from 2.4% the month prior, while the core rate of inflation slipped to 2.1% from 2.3% during the same period. Indeed, falling energy prices attributed to a 1.7% decline in transportation costs, but we may see Canadian firms continue to offer discounted prices in an effort to draw greater demand. As a result, the Bank of Canada (BoC) may further delay normalizing monetary policy, and Governor Stephen Poloz may continue to endorse the accommodative policy stance over the near to medium-term in order to encourage a stronger recovery. The market reaction was short-lived as USD/CAD quickly slipped back below the 1.1625 region, and the pair continued to consolidate throughout the North American trade as it ended the day at 1.1602.

--- 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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