USD/CAD Tests 1.3360 Hurdle Even as BoC Warns of Stronger 4Q GDP
- Canada Growth Rate to Expand for Second Straight Quarter.
- Bank of Canada (BoC) Warns 4Q GDP Could Be ‘Slightly Stronger than Expected.’
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Trading the News: Canada Quarterly Gross Domestic Product (GDP)
With Canada’s growth rate projected to increase an annualized 2.0% in the last three-months of 2016, a slowdown in economic activity may fuel the near-term advance in the USD/CAD exchange rate as it encourages the Bank of Canada (BoC) to tame interest rate expectations.
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Why Is This Event Important:
Even though the Bank of Canada (BoC) argues ‘growth in the fourth quarter of 2016 may have been slightly stronger than expected,’ Governor Stephen Poloz and Co. appear to be in no rush to lift the benchmark interest rate from the record-low as ‘the Bank’s three measures of core inflation, taken together, continue to point to material excess capacity in the economy.’ With that said, the diverging paths for monetary policy may continue to instill a long-term bullish outlook for USD/CAD especially as Fed Fund Futures now show a greater than 60% probability for a March rate-hike.
Expectations: Bullish Argument/Scenario
|CFIB Business Barometer (FEB)||--||62.9|
|Net Change in Employment (JAN)||-10.0K||48.3K|
|Housing Starts (JAN)||197.3K||207.4K|
Improved confidence accompanied by the ongoing improvement in the labor market may generate another better-than-expected GDP report, and a positive development may sway the BoC to drop its dovish tone over the coming months as signs of stronger growth boosts the outlook for inflation.
Risk: Bearish Argument/Scenario
|Raw Materials Price Index (MoM) (JAN)||1.2%||1.7%|
|Retail Sales (MoM) (DEC)||0.0%||-0.5%|
|Ivey Purchasing Manager Index s.a. (JAN)||--||57.2|
Nevertheless, rising input costs paired with the slowdown in private-sector consumption may drag on the growth rate, and a dismal GDP print may dampen the appeal of the Canadian dollar as it puts pressure on Governor Poloz to further support the real economy.
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How To Trade This Event Risk(Video)
Bullish CAD Trade: Canada GDP Report Continues to Beat Market 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 Canadian dollar 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: Growth Rate Expands Less Than 2.0% per Annum
- 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
Chart - Created Using Trading View
- USD/CAD stands at risk of extending the rebound from the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.3020 (50% expansion) as it clears the near-term range, with the Relative Strength Index (RSI) highlighting a similar dynamic and breaks out of a holding pattern; need a break/close above 1.3360 (38.2% retracement) to open up the next topside area of interest around 1.3450 (23.6% retracement) to 1.3460 (61.8% retracement).
- Interim Resistance: 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion)
- Interim Support: 1.2980 (61.8% retracement) to 1.3020 (50% expansion)
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Impact that Canada’s GDP report has had on USD/CAD during the previous quarter
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
3Q 2016 Canada Gross Domestic Product (GDP)
Chart - Created Using Trading View
Canada avoid a technical recession in 2016, with the growth rate expanding an annualized 3.5% following a revised 1.3% contracting during the three-months through June. The rebound in economic activity was larger driven by a pickup in net-exports, with household consumption advancing 2.6% during the same period, while private-sector spending narrowed 1.3% followed the 5.3% expansion in the second-quarter. The market reaction to the GDP report was short-lived, with USD/CAD bouncing back from 1.3359 to end the day at 1.3437.
--- Written by David Song, Currency Analyst
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