Strong Canada CPI, Retail Sales to Drag on USD/CAD Rate

- Canada Consumer Price Index (CPI) to Climb Annualized 2.0%.

- Retail Sales to Increase Another 0.3% in October.

Trading the News: Canada Consumer Price Index (CPI)

The near-term rebound in USD/CAD may continue to unravel over the next 24-hours of trade as Canada’s Consumer Price Index (CPI) is expected to pick up to annualized 2.0% in November, while Retail Sales are projected to increase another 0.3% in October.

Faster price growth paired with signs of stronger consumption may encourage the Bank of Canada (BoC) to adopt a more hawkish tone in 2018 as ‘inflation has been slightly higher than anticipated and will continue to be boosted in the short term by temporary factors.’ As a result, Governor Stephen Poloz and Co. may emphasize ‘higher interest rates will likely be required over time’ at the next meeting on January 17, with the Canadian dollar at risk of exhibiting a more bullish behavior as the BoC appears to be on track to further normalize monetary policy over the coming months.

However, a series of below-forecast prints may ultimately fuel the recent advance in the dollar-loonie exchange rate as it dampens bets for an imminent BoC rate-hike.

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

October 2017 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute Chart

Canada’s Consumer Price Index (CPI) narrowed to an annualized 1.4% from 1.6% in September, while the core rate of inflation advanced to 1.6% from 1.5% during the same period. A deeper look at the report showed the slowdown was led by a 3.2% decline in gasoline prices, with the cost for energy also slipping 1.8%, while prices for clothing/footwear increased another 1.5% in October.

The Canadian dollar struggled to hold its ground following the CPI report, with USD/CAD climbing above the 1.2800 handle, but the reaction was short-lived as the pair ended the day at 1.2769. Looking to trade Canada’s CPI report but don’t have a strategy? Download & review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

USD/CAD Daily Chart

• Break of the monthly opening range keeps the topside targets on the radar for USD/CAD, but the near-term outlook remains clouded with mixed signals as the Relative Strength Index (RSI) continues to track the bearish formation carried over from November.
• The string of failed attempts to test the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region suggests the advance from the September-low (1.2061) is losing momentum, with a move below the 1.2720 (38.2% retracement) to 1.2770 (38.2% expansion) area raising the risk for a run at the monthly-low (1.2624).
• Need a break/close below 1.2620 (50% retracement) to open up the downside targets, with the first hurdle coming in around 1.2440 (23.6% expansion) to 1.2510 (78.6% retracement) followed by 1.2350 (38.2% expansion).

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--- Written by David Song, Currency Analyst

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

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