- Canada Consumer Price Index (CPI) to Increase for First Time Since January.

- Core Rate of Inflation to Pick Up for First Time in 2017.

Trading the News: Canada Consumer Price Index (CPI)

Canada CPI

A pickup in Canada’s Consumer Price Index (CPI) may generate a near-term pullback in USD/CAD as signs of stronger inflation puts pressure on the Bank of Canada (BoC) to lift the benchmark interest rate off of the record-low.

Why Is This Event Important:

Faster price growth may push the BoC to change its tune for monetary policy as ‘recent data indicate that economic growth has been faster than was expected,’ but central bank may merely attempt to buy more time at the next interest rate decision on May 24 as officials expected inflation to ‘return to 2 per cent later in the projection horizon as the output gap closes.’ With that said, the BoC may stick to the current script as the core rate of inflation remains subdued, and more of the same from Governor Stephen Poloz and Co. may support a long-term bullish outlook for USD/CAD especially as the Federal Open Market Committee (FOMC) is widely anticipated to deliver a 25bp rate-hike in June.

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Impact that Canada’s CPI report has had on USD/CAD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR

2017

04/21/2017 12:30:00 GMT

1.8%

1.6%

+52

+33

March 2017 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

USD/CAD Chart

Canada’s Consumer Price Index (CPI) narrowed more than expected in March, with the headline reading slipping to an annualized 1.6% from 2.0% the month prior, while the core rate of inflation held steady at 1.3% for the third consecutive month. A deeper look at the report showed the cost for food fell 1.9% per annum, with prices for clothing/footwear contraction 0.9% during the same period, while gasoline prices climbed an annualized 15.2% in March. The Canadian dollar struggled to hold its ground following the soft inflation report, with USD/CAD bouncing back from 1.3457 to end the day at 1.3494.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Headline & Core Inflation Pick Up in April

  • Need a red, five-minute candle following the CPI report to consider a short USD/CAD trade.
  • If market reaction favors a bullish loonie trade, sell USD/CAD with two separate lots.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bearish CAD Trade: Canada CPI Continues to Disappoint

  • Need a green, five-minute USD/CAD candle to favor a short loonie trade.
  • Carry out the same setup as the bullish loonie setup, just in the opposite direction.

Potential Price Targets For The Release

USD/CAD Daily

USD/CAD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for USD/CAD remains tilted to the topside as price & the Relative Strength Index (RSI) retain the bullish formation from earlier this year, but the pair stands at risk for a near-term pullback as it comes off of channel resistance.
  • The momentum indicator appears to be highlighting a similar dynamic as the oscillator continues its decent from overbought territory, with a break/close below the Fibonacci overlap around 1.3560 (50% expansion) to 1.3570 (61.8% expansion) opening up the next downside region of interest around 1.3510 (50% expansion).
  • Interim Resistance: 1.3790 (100% expansion) to 1.3840 (61.8% retracement)
  • Interim Support: 1.3280 (50% retracement) to 1.3310 (38.2% retracement)

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IG Sentiment

Retail trader data shows 36.6% of traders are net-long USD/CAD with the ratio of traders short to long at 1.73 to 1. In fact, traders have remained net-short since April 18 when USD/CAD traded near 1.33242; price has moved 2.2% higher since then. The number of traders net-long is 19.7% higher than yesterday and 19.1% higher from last week, while the number of traders net-short is 12.3% lower than yesterday and 24.5% lower from last week. For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

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--- Written by David Song, Currency Analyst

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