Sticky Canada CPI to Fuel Larger USD/CAD Correction
- Canada’s Consumer Price Index (CPI) to Climb Annualized 1.7%- Highest Reading Since November 2014.
- Core Rate of Inflation to Hold at 2.0% for Second Consecutive Month.
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Trading the News: Canada Consumer Price Index (CPI)
A pickup in Canada’s Consumer Price Index (CPI) may heighten the appeal of the loonie and fuel a larger pullback in USD/CAD as it encourages the Bank of Canada (BoC) to retain a wait-and-see approach in 2016.
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Why Is This Event Important:
With the BoC largely endorsing a neutral outlook for monetary policy, it seems as though the central bank is approaching the end of its easing cycle, and signs of sticky price growth may prompt Governor Stephen Poloz to adopt a more hawkish tone over the coming months as the risks to the inflation outlook are ‘roughly balanced.’
Expectations: Bullish Argument/Scenario
|Wholesale Trade Sales (MoM) (NOV)||0.4%||1.8%|
|Manufacturing Sales (MoM) (NOV)||0.5%||1.0%|
|Business Outlook Future Sales (4Q)||10.00||16.00|
Improved confidence accompanied by the recent pickup in private-sector spending may encourage Canadian businesses to boost consumer prices, and a marked pickup in the headline as well as core rate of inflation may pave the way for a near-term correction in the exchange rate as market participants scale back bets for a BoC rate-cut.
Risk: Bearish Argument/Scenario
|Industrial Product Price (MoM) (NOV)||0.1%||-0.2%|
|Raw Materials Price Index (MoM) (NOV)||-2.5%||-4.0%|
|Gross Domestic Product (YoY) (OCT)||-0.1%||-0.2%|
However, the protracted recovery may push firms may offer discounted prices amid low input costs, and an softer-than-expected inflation report may renew the bearish sentiment surrounding the loonie as market participants look for additional monetary support in Canada.
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How To Trade This Event Risk(Video)
Bullish CAD Trade: Sticky Inflation Dampens Bets for BoC Rate-Cut in 2016
- 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: Headline, Core CPI Fall 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.
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Potential Price Targets For The Release
Chart - Created Using FXCM Marketscope 2.0
- Long-term outlook remains tilted to the upside USD/CAD amid the broader series of higher highs & lows in the exchange rate, but the sharp pullback in the Relative Strength Index (RSI) may foreshadow a larger correction in the dollar-loonie as the oscillator comes off of overbought territory and fails to preserve the bullish formation from back in November.
- DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short USD/CAD since November 4, but the ratio continues to come off of recent extremes as it narrows to -1.89, with 35% of traders now long.
- Interim Resistance: 1.4660 (78.6% retracement) to 1.4730 (78.6% expansion)
- Interim Support: 1.3420 (38.2% expansion) to 1.3460 (61.8% retracement)
Impact that Canada CPI has had on USD/CAD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
November 2015 Canada Consumer Price Index
Canada’s Consumer Price Index (CPI) rose an annualized 1.4% in November after expanding 1.0% the month prior, while the core rate of inflation unexpectedly slowed to 2.0% from 2.1% during the same period. A deeper look at the report showed the cost of recreation/education slipping another 1.8% in November to lead the decline, with prices for clothing and footwear falling 0.7%, while transportation costs increased 0.4% despite weaker energy prices. Signs of easing price growth may push the Bank of Canada (BoC) to further insulate the real economy as the region emerges from a technical recession in 2015. The market reaction to the weaker-than-expected CPI print was short-lived, with USD/CAD pulling back from the 1.4000 region to end the day at 1.3957.
--- Written by David Song, Currency Analyst and Shuyang Ren
To contact David, e-mail firstname.lastname@example.org. Follow me on Twitter at @DavidJSong.
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