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Sticky Canada CPI to Foster Larger USD/CAD Pullback

Sticky Canada CPI to Foster Larger USD/CAD Pullback

David Song, Strategist

- Canada Consumer Price Index (CPI) to Uptick for Second Straight Month.

- Core Rate of Inflation to Hold Steady at Annualized 1.8% for Third Consecutive Month.

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

Trading the News: Canada Consumer Price Index (CPI)

Another uptick in Canada’s Consumer Price Index (CPI) along with stickiness in the core rate of inflation may foster a larger pullback in USD/CAD as the Bank of Canada (BoC) ‘expects total CPI inflation to be close to 2 percent from early 2017 onwards.’

What’s Expected:

DailyFX Calendar

Click Here for the DailyFX Calendar

Why Is This Event Important:

Even though the BoC ‘actively’ discussed more stimulus for the real economy, it seems as though Governor Stephen Poloz and Co. will continue to endorse a wait-and-see approach for monetary policy as ‘Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016.’ The risk of overshooting the 2% target for inflation may push the BoC to gradually move away from its easing-cycle, but signs of subdued price growth may encourage the central bank to further support the real economy as the region is anticipated to return to ‘full capacity around mid-2018, materially later than the Bank had anticipated in July.’

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (OCT)

56.0

59.7

Net Change in Employment (OCT)

-15.0K

43.9K

Business Outlook Future Sales (3Q)

--

12.00

The pickup in business confidence paired with the ongoing improvement in the labor market may fuel faster price growth in Canada, and a positive development may boost the appeal of the Canadian dollar as market participants scale back bets for another round of monetary stimulus.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

International Merchandise Trade (SEP)

-1.70B

-4.08B

Raw Materials Price Index (MoM) (SEP)

0.5%

-0.1%

Retail Sales (MoM) (AUG)

0.3%

-0.1%

Nevertheless, easing input-costs accompanied by the slowdown in private-sector consumption may push Canadian firms to offer discounted prices, and a softer-than-expected inflation report may spark a bearish reaction in the loonie as it puts increased pressure on the BoC to further embark on its easing-cycle.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Canada CPI Picks Up for Second Consecutive Month

  • Need to see red, five-minute candle following the release to consider a short trade on USD/CAD.
  • If market reaction favors a long 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: Inflation 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 the opposite direction.

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Calendar

Chart - Created Using Trading View

  • Broader outlook for USD/CAD remains constructive as the pair preserves the upward trending channel carried over from earlier this year, with the Relative Strength Index (RSI) highlighting a similar dynamic, but the recent series of lower highs & lows may pave a larger pullback in the exchange rate especially as the oscillator struggles to push into overbought territory.
  • Interim Resistance: 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion)
  • Interim Support: 1.2980 (61.8% retracement) to 1.3030 (50% retracement)

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

Impact that Canada’s CPI report 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)

SEP

2016

10/21/2016

12:30 GMT

1.4%

1.3%

+102

+99

September 2016 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

USD/CAD Chart

Canada’s Consumer Price Index (CPI) climbed an annualized 1.3% in September following a 1.1% expansion the month prior, while the core rate of inflation held steady at an annualized 1.8% for the second consecutive month. The weakness was largely driven by a 1.3% decline in the cost for food, while prices for clothing & footwear increased another 3.4% following the 1.1% expansion in August, with gasoline prices rebounding 0.8% during the same period. The Canadian dollar sold off following the softer-than-expected inflation report, with USD/CAD climbing above the 1.3300 handle to end the day at 1.3333.

Get our top trading opportunities of 2016 HERE

Read More:

US Dollar Whiplash Ends with a Trump Bump

GBP/JPY Technical Analysis: New Trend in Play after 800-Pip, 3-Day Romp

USD/CAD Technical Analysis: Pending Trade Talks & U.S. Inflation Weakens CAD

S&P 500 - Bears Got Trumpled, Short-term Trading Levels Noted

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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