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Strong Canada Core CPI to Undermine USD/CAD Rebound

Strong Canada Core CPI to Undermine USD/CAD Rebound

2015-10-23 08:00:00
David Song, Shuyang Ren,
Share:

- Canada’s Headline Consumer Price Index (CPI) to Slow for First Time in Since April.

- Core Rate of Inflation to Uptick to Annualized 2.2% From 2.1%- Lowest Since February.

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Trading the News: Canada Consumer Price Index (CPI)

Despite forecasts for a slowdown in Canada’s Consumer Price Index (CPI), an uptick in the core rate of inflation may heighten the appeal of the loonie and spur a near-term decline in USD/CAD as it boosts interest rate expectations.

What’s Expected:

USD/CAD Canada CPI

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Why Is This Event Important:

Even though the Bank of Canada (BoC) endorses a neutral outlook for monetary policy, a pickup in the core CPI may fuel concerns of overshooting the inflation target, and Governor Stephen Poloz may adopt a more hawkish tone over the coming months as the central bank sees the region emerging from the technical recession from earlier this year.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (AUG)

0.1%

0.5%

Business Outlook Future Sales (3Q)

4.00

16.00

Gross Domestic Product (MoM) (JUL)

0.2%

0.3%

Signs of a stronger recovery accompanied by the expansion in private-sector may encourage sticky price growth, and a pickup in the core rate of inflation may spur greater demand for the loonie as the economic outlook improves.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Existing Home Sales (MoM) (SEP)

--

-2.1%

Building Permits (MoM) (AUG)

0.3%

-3.7%

International Merchandise Trade (AUG)

-1.20B

-2.53B

However, Canadian firms may offer discounted prices amid the slowdown in foreign demand accompanied by the ongoing slack in the real economy, and a weaker-than-expected CPI print may reinforce a long-term bullish outlook for USD/CAD amid the deviating paths for monetary policy.

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How To Trade This Event Risk(Video)

Bullish CAD Trade: Core Rate of Inflation Climbs to 2.2% or Higher

  • 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: CPI Report Falls Short of Market Expectations

  • 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 remains bullish for USD/CAD amid the broader series of higher highs & lows, but the pair may continue to congest over the near-term as the Relative Strength Index (RSI) largely preserves the bearish formation from back in July.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped back to net-short USD/CAD following the Bank of Canada (BoC) rate decision on October 21, with the ratio currently standing at -1.07 as 48% of traders are long.
  • Interim Resistance: 1.3440 (50% expansion) to 1.3460 (61.8% retracement)
  • Interim Support: 1.2790 (50% retracement) to 1.2800 (38.2% expansion)

Read More:

EURCAD Bulls Brace for ECB- Rally Vulnerable Sub 1.4955

USD/CAD Technical Analysis: BoC Moves Pair To Critical Resistance

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)

AUG

2015

09/18/2015

12:30 GMT

1.3%

1.3%

+23

+195

August 2015 Canada Consumer Price Index

USD/CAD Chart

Canada’s Consumer Price Index (CPI) held steady at an annualized rate of 1.3%, while the core rate of inflation narrowed to 2.1% from 2.4% during the same period to mark the slowest pace of growth since February. Lower oil prices continued to drag on inflation, with Gasoline, Energy and Transportation costs contracting from the previous month, while prices for Clothing, Footwear climbed 1.1% during the same period, suggesting that Canadian firms are scaling back on discounting. Sticky price growth may encourage the Bank of Canada (BoC) to preserve its current policy throughout 2015, but Governor Stephen Poloz may retain a cautious outlook for the region as the economy faces a technical recession. Despite the in-line prints, the Canadian dollar struggled to hold its ground following the slowdown in core CPI, with USD/CAD climbing above the 1.3100 handle and closing the day at 1.3218.

--- 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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