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USD/CAD to Extend Losses on Sticky Canada CPI Report

USD/CAD to Extend Losses on Sticky Canada CPI Report

David Song, Shuyang Ren,

- Canada’s Consumer Price Index (CPI) to Slow to 1.5%- Lowest Since November 2015.

- Core Rate of Inflation to Hold at 2.0% for Second Straight Month.

For more updates, sign up for David's e-mail distribution list.

Trading the News: Canada Consumer Price Index (CPI)

Despite forecasts for a marked slowdown in Canada’s Consumer Price Index (CPI), stickiness in the core rate of inflation may encourage the Bank of Canada (BoC) to move away from its easing cycle following the ‘insurance’ rate-cuts in 2015.

What’s Expected:

USD/CAD Canada CPI

Click Here for the DailyFX Calendar

Why Is This Event Important:

Signs of stable price growth may prompt the BoC to adopt a more hawkish tone for monetary policy as the risks surrounding the region appear to be ‘roughly-balanced,’ and Governor Stephen Poloz may change his tune over the coming months especially as Prime Minister Justin Trudeau pledges to support the economy with fiscal stimulus.

Expectations: Bullish Argument/Scenario

ReleaseExpectedActual
Gross Domestic Product (Annualized) (4Q)0.0%0.8%
Industrial Product Price (MoM) (JAN)0.0%0.5%
CFIB Business Barometer (FEB)--54.7

The unexpected pickup in economic activity accompanied by rising factory-gate prices may encourage Canadian firms to boost consumer prices, and a stronger-than-expected CPI report may spur a further decline in USD/CAD as it boosts interest-rate expectations.

Risk: Bearish Argument/Scenario

ReleaseExpectedActual
Wholesale Trade Sales (MoM) (JAN)0.3%0.0%
Net Change in Employment (FEB)10.0K-2.3K
Retail Sales (MoM) (DEC)-0.9%-2.2%

However, easing job growth paired with the slowdown in private-sector consumption may drag on price growth, and a dismal development may spur a bearish reaction in the Canadian dollar as it fuels speculation for additional monetary support.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Sticky Core Inflation Boosts Interest-Rate Expectations

  • 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 Miss 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 Using FXCM Marketscope 2.0

  • Long-term outlook for USD/CAD remains bullish especially as the Federal Reserve appears to be on course to further normalize monetary policy in 2016, but the failure to retain the ascending channel from back in 2014 may produce a larger decline in the days ahead as the pair continues to search for support.
  • Interim Resistance: 1.3600 (50% expansion) to 1.3630 (38.2% retracement)
  • Interim Support: 1.2860 (78.6% retracement) to 1.2930 (61.8% expansion)

Check out the short-term technical levels that matter for USD/CAD heading into the report!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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

PeriodData ReleasedEstimateActualPips ChangePips Change

JAN

2016

02/19/2015

13:30 GMT

1.8%2.0%+56-13

January 2016 Canada Consumer Price Index

USD/CAD Chart

Canada’s Consumer Price Index (CPI) unexpectedly jumped to an annualized 2.0% in January from 1.6% the month prior, with the core rate of inflation also outpacing market expectations as the figure advanced to 2.0% amid forecasts for a 1.9% print. A deeper look at the report showed a further decline in energy prices paired with another round of discounting for Clothing & Footwear, while food costs climbed 1.5%, with prices for Alcohol & Tobacco advancing 0.7% during the same period. Despite a slow progress in energy price growth, it seems the Bank of Canada (BoC) will retain a neutral tone for an extended period of time before any major change in the market. Despite the stronger-than-expected print, the U.S. CPI release overshadowed the Canadian data print, with USD/CAD climbing to a daily high of 1.3846.

Read More:

US Dollar – Breakdown Continues, Reprieve Ahead?

AUD/USD Post-FOMC Rally at Risk Ahead of Australian Labor Report

Long-term Low in Silver?

Long Term Cyclical Influence Nears for AUD/USD

Get our top trading opportunities of 2016 HERE

--- 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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