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Robust Canada CPI to Fuel Larger USD/CAD Pullback- 1.2800 on Radar

Robust Canada CPI to Fuel Larger USD/CAD Pullback- 1.2800 on Radar

2015-08-21 08:00:00
David Song, Shuyang Ren,
Share:

- Canada Consumer Price Index (CPI) to Increase for Third Consecutive Mont.

- Core Rate of Inflation to Climb for Second Month to Annualized 2.4%.

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Trading the News: Canada Consumer Price Index (CPI)

Canada’s Consumer Price Index (CPI) may boost the appeal of the loonie and trigger a near-term decline in USD/CAD should the report dampen speculation for another Bank of Canada (BoC) rate cut.

What’s Expected:

USD/CAD CPI

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Why Is This Event Important:

A series of positive data prints may keep the BoC on the sidelines throughout the remainder of the year as the central bank cut the benchmark interest rate to a record-low of 0.50%, and Governor Stephen Poloz may largely endorse a wait-and-see approach over the near to medium-term as the recent efforts feed through the real economy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Wholesale Trade Sales (MoM) (JUN)

0.9%

1.3%

Net Change in Employment (JUL)

5.0K

6.6K

Retail Sales (MoM) (MAY)

0.6%

1.0%

The pickup in private-sector spending along with the ongoing improvement in the labor market may encourage Canadian firms to boost consumer prices, and signs of sticky inflation may spur a material shift in the BoC’s rhetoric as price growth continues to run above the 2% target .

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (JUL)

--

-0.4%

Gross Domestic Product (MoM) (MAY)

0.0%

-0.2%

Raw Materials Price Index (MoM) (JUN)

1.0%

0.0%

In contrast, fears of a technical recession paired with lower input costs may continue to drag on price growth, and a dismal CPI print may heighten the bearish sentiment surrounding the Canadian dollar as the BoC retains a cautious outlook for the region.

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How To Trade This Event Risk(Video)

Bullish CAD Trade: Headline & Core CPI Highlight Stronger Price Growth

  • Need to see red, five-minute candle following the release to consider a short trade on USD/CAD.
  • If market reaction favors a bullish loonie trade, sell USD/CAD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for 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: Canada Inflation Falls Short of Market Forecast

  • Need green, five-minute candle to favor a long USD/CAD trade.
  • Implement same setup as the bullish Canadian dollar trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created by David Song

  • Long-term outlook for USD/CAD remains bullish amid the divergence in monetary policy, but the failure to retain the bullish RSI momentum carried over from May raises the risk for a larger pullback.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short USD/CAD since June 18, but the ratio has come off of recent extremes as it narrows to -2.13, with 32% of traders long.
  • Interim Resistance: 1.3210 (78.6% expansion) to 1.3212 (August high)
  • Interim Support: 1.2800 (38.2% expansion) to 1.2834 (March high)

Read More:

Retail FX Fades EUR/USD Resilience as Pair Probes 1.1200 Resistance

EURUSD Surges to Fresh Weekly High on FOMC Leak- Long Scalps Favored

Impact that Canada CPI has had on USD/CAD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUN

2015

07/17/2015

12:30 GMT

1.0%

1.0%

-9

-8

June 2015 Canada Consumer Price Index

Robust Canada CPI to Fuel Larger USD/CAD Pullback- 1.2800 on Radar

Canada’s Consumer Price Index (CPI) came in-line with market expectations as the headline print increased an annualized rate of 1.0% in June following the 0.9% expansion the month prior. However, the core rate of inflation unexpectedly accelerated to 2.3% after rising 2.2% in May. Despite the stickiness in price growth, the Bank of Canada (BoC) may keep the door open to further support the real economy after lowering the benchmark interest rate to a record-low of 0.50% amid the growing risk for a technical recession. The initial market reaction was short-lived, with USD/CAD snapping back above 1.3000, but the pair consolidated throughout the North America trade to end the day at 1.2968.

--- 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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