Slowing Canada CPI to Fuel USD/CAD Advance- June High in Focus
- Canada Consumer Price Index (CPI) to Slow for Third Time in 2016.
- Core Rate of Inflation to Narrow for Second Time in 2016.
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Trading the News: Canada Consumer Price Index (CPI)
A slowdown in Canada’s headline & core Consumer Price Index (CPI) may drag on the loonie and fuel the near-term advance in USD/CAD as it puts pressure on the Bank of Canada (BoC) to further support the real economy.
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Why Is This Event Important:
Even though BoC Governor Stephen Poloz sticks to the sidelines in 2016 and largely endorse a wait-and-see approach for monetary policy, the central bank may revert back to its easing cycle in an effort to encourage a stronger recovery.
Expectations: Bearish Argument/Scenario
|Gross Domestic Product (Annualized) (1Q)||2.8%||2.4%|
|Raw Materials Price Index (MoM) (APR)||1.1%||0.7%|
|Retail Sales (MoM) (MAR)||-0.6%||-1.0%|
The slowdown in private-sector consumption along with subdued input prices may push Canadian firms to offer discounted prices, and a weak inflation print may produce short-term headwinds for the loonie as market participants adjust their outlook for monetary policy.
Risk: Bullish Argument/Scenario
|Teranet/National Bank Home Price Index (YoY) (MAY)||--||9.0%|
|Net Change in Employment (MAY)||1.8K||13.8K|
|New Housing Price Index (YoY) (APR)||2.1%||2.1%|
However, sticky home prices accompanied by the ongoing improvement in the labor market may boost consumer prices, and a stronger-than-expected CPI report may heighten the appeal of the Canadian dollar as it raises the BoC’s scope to move away from its easing cycle.
How To Trade This Event Risk(Video)
Bearish CAD Trade: Headline & Core Rate of Inflation Slows in May
- 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: Canada CPI Report Beats 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
- USD/CAD may make a more meaningful attempt to break out of the descending channel carried over from the previous month, with a move above the June high (1.3143) raising the risk for a larger advance as it clears the recent series of lower highs & lows.
- Key Resistance: 1.3560 (100% expansion) to 1.3630 (38.2% retracement)
- Key Support: 1.2510 (78.6% retracement) to 1.2520 (38.2% expansion)
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Impact that Canada Consumer Price Index (CPI) has had on USD/CAD during the last release
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
April 2016 Canada Consumer Price Index (CPI)
Canada’s Consumer Price Index (CPI) climbed an annualized 1.7% in April following the 1.3% expansion the month prior, while the core rate of inflation unexpectedly advanced 2.2% during the same period amid forecasts for a 2.0% print. A deeper look at the report showed transportation costs increased 2.0% as energy prices climbed 3.8%, while prices for clothing and footwear held flat in April, with food costs falling 0.5% following a 0.3% contraction in March. Despite the stronger-than-expected CPI report, the Canadian dollar struggled to hold its ground, with USD/CAD climbing back above the 1.3100 handle to end the day at 1.3107.
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--- Written by David Song, Currency Analyst
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