USD/CAD to Hold Post-Fed Low on Dismal Canada CPI Report
- Canada CPI to Hold Steady at Annualized 1.3%- Fastest Pace of Growth for 2015.
- Core Rate of Inflation to Slow to 2.1%- Slowest Rate of Expansion Since February.
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Trading the News: Canada Consumer Price Index (CPI)
Even though Canada’s Consumer Price Index (CPI) is expected to expand an annualized 1.3% in August, a marked slowdown in the core rate of inflation may dampen the appeal of the loonie and spur a near-term rally in USD/CAD as it boosts expectations for additional monetary support.
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Why Is This Event Important:
Despite the wait-and-see approach endorsed by the Bank of Canada (BoC), easing price growth may encourage Governor Stephen Poloz to further insulate the real economy, and the central bank may keep the door open to implement additional rate cuts as the region continues to adjust to the decline in oil prices.
Expectations: Bearish Argument/Scenario
|Purchasing Manager Index- Manufacturing (AUG)||--||49.4|
|Current Account Balance (2Q)||-$16.90B||-$17.40B|
|Raw Materials Prices Index (MoM) (JUL)||-4.3%||-5.9%|
Canadian firms may offer discounted prices especially as the economy enters a technical recession, and a dismal inflation report may renew the bearish sentiment surrounding the loonie as the BoC continues to gauge the ongoing slack in the real economy.
Risk: Bullish Argument/Scenario
|Manufacturing Sales (MoM) (JUL)||1.1%||1.7%|
|Net Change in Employment (AUG)||-5.0K||12.0K|
|Retail Sales (MoM) (JUN)||0.2%||0.6%|
Nevertheless, the pickup in private consumption along with the ongoing improvement in the labor market may help to encourage sticky price growth, and a better-than-expected CPI print may spur a further decline in USD/CAD as the Federal Reserve further delays its normalization cycle.
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How To Trade This Event Risk(Video)
Bearish CAD Trade: Canada Inflation Report Disappoints
- Need to see green, five-minute candle following the release to consider a long trade on USD/CAD.
- If market reaction favors a bearish loonie trade, buy USD/CAD with two separate position.
- Set stop at the near-by swing low/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.
Bullish CAD Trade: Headline & Core CPI Exceed Market Forecast
- Need red, five-minute candle to favor a short USD/CAD trade.
- Implement same setup as the bearish Canadian dollar trade, just in reverse.
Potential Price Targets For The Release
Chart - Created by David Song
- Failure to retain the upward trend from late-July raises the risk for a larger pullback in USD/CAD especially as the Relative Strength Index (RSI) fails to retain the bullish pattern from back in April.
- DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short USD/CAD since June 18, but the ratio remains off of recent extremes as it holds at -1.52, with 40% of traders long.
- Interim Resistance: 1.3320 (38.2% expansion) to 1.3352 (August high)
- Interim Support: 1.2940 (78.6% retracement) to 1.2930 (61.8% expansion)
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Impact that Canada CPI has had on USD/CAD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
July 2015 Canada Consumer Price Index
Canada’s Consumer Price Index (CPI) rose for the third consecutive month in July, with the headline reading climbing an annualized 1.3% to mark the fastest pace of growth for 2015. At the same time, the core rate of inflation increased 2.4% from 2.3% the month prior to match market expectations. Despite sticky price growth, the Bank of Canada (BoC) may keep the door open to further reduce the benchmark interest rate as the central bank continues to monitor the economic adjustment to lower oil prices. The initial market reaction was short-lived, with USD/CAD climbing above the 1.3150 during the North American trade to end the day at 1.3179.
--- Written by David Song, Currency Analyst and Shuyang Ren
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