USD/CAD to Mount Larger Advance on Slowing Canada Inflation
- Canada Consumer Price Index (CPI) to Slow for Second Consecutive Month.
- Core Rate of Inflation to Narrow for Third Time in 2016.
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Trading the News: Canada Consumer Price Index (CPI)
Another downtick in Canada’s headline & core Consumer Price Index (CPI) may push USD/CAD to fresh weekly highs as it puts pressure on the Bank of Canada (BoC) to further embark on its easing cycle.
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Why Is This Event Important:
Even though BoC Governor Stephen Poloz largely endorses a wait-and-see approach for monetary policy, the central bank may keep the door open to further reduce the benchmark interest rate as the Canadian economy continues to adjust to the oil-price shock.
Expectations: Bearish Argument/Scenario
|Existing Home Sales (MoM) (JUN)||--||-0.9%|
|Building Permits (MoM) (MAY)||1.5%||-1.9%|
|International Merchandise Trade (MAY)||-2.70B||-3.28B|
Easing home prices accompanied by the weakening outlook for global growth may drag on inflation, and a dismal CPI report may produce near-term headwinds for the Canadian dollar as it fuels speculation for additional monetary support.
Risk: Bullish Argument/Scenario
|Wholesale Trade Sales (MoM) (MAY)||0.2%||1.8%|
|Raw Materials Price Index (MoM) (MAY)||5.0%||6.7%|
|Retail Sales (MoM) (APR)||0.8%||0.9%|
However, rising input costs paired with the pickup in private-sector consumption may prompt Canadian firms to boost consumer prices, and an unexpected uptick in the headline as well as core rate of inflation may heighten the appeal of the Canadian dollar as it encourages the BoC to gradually 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 continue to face range-bound prices as it largely preserves the wedge/triangle formation from earlier this year, with the pair capped around 1.3130 (38.2% retracement), while near-term support comes in around 1.2620 (50% retracement) to 1.2650 (50% retracement).
- 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)
Check out the short-term technical levels that matter for USD/CAD heading into the report!
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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|
May 2016 Canada Consumer Price Index (CPI)
Canada’s headline reading for inflation slipped to an annualized 1.5% from 1.7% in May, led by falling food prices, with the core rate narrowed to 2.1% from 2.2% during the same period. A deeper look the report showed the cost for food contracted another 0.3% in May,with prices for clothing & footwear holding flat for the second consecutive month, while transportation costs increased 1.3% during the same period. Nevertheless, the initial market reaction was short-lived, with USD/CAD coming off of the 1.2900 handle to end the day at 1.2888.
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--- Written by David Song, Currency Analyst
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