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USD/CAD in Focus to Close the Trading Week With CPI Data on Tap

USD/CAD in Focus to Close the Trading Week With CPI Data on Tap

2016-08-19 09:05:00
Oded Shimoni, Junior Currency Analyst

Talking Points:

- USD/CAD trading above the 1.28 handle after one of the longest consecutive days decline in years

- Canadian CPI data a major event risk on the docket

- 20-day USD/CAD and Crude Oil correlation at -0.83 at the time of writing, 10-day at -0.92

The USD/CAD is trading above 1.28 at the time of writing, apparently finding some support following one of the longest consecutive days decline in years.

In the outlook for the pair last week, we suggested that in the current trading environment, with major central bank meetings in the rearview mirror, focus may now start to shift more to Crude Oil prices as a major market theme and a directional cue for short term traders as well, while putting focus on possible breakout from a technical consolidation pattern.

Indeed, 20-day USD/CAD and Crude Oil correlation sites at -0.83 at the time of writing, and 10-day correlation at an impressive -0.92.

With that said, Canada data prints could affect the currency, and today’s Canadian CPI figures take center stage in the hours ahead.

Against this backdrop we will form our outlook and look to find short term trading opportunities using different tools such as the Grid Sight Index (GSI) indicator.

USD/CAD in Focus to Close the Trading Week With CPI Data on Tap

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Canadian July CPI readings are set to hit the wires 12:30 GMT. Headline CPI is expected to slightly downtick for a 1.4% year-on-year print, while Core CPI is anticipated to remain at 2.1%.

With risks surrounding the inflation outlook remaining ‘roughly balanced’, the BOC might opt to remain on the sidelines and continue to endorse a perceived “neutral” monetary policy stance.

Taking that into consideration, initial market reaction to the figures could be a straightforward move on better/ worse than expected figures.

An interesting scenario could potentially develop if we see a slight miss to expectations in the headline figure. If at the time the figures hit the wires Crude Oil is showing a strong bid, an initial knee-jerk USD/CAD advance might provide an opportunity for participants looking for a correction in the pair.

USD/CAD Technical Levels:

USD/CAD in Focus to Close the Trading Week With CPI Data on Tap

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We use volatility measures as a way to better fit our strategy to market conditions. The USD/CAD is seeing slightly subdued levels of volatility lately (based on 20-day ATR readings), despite the impressive move to the downside. 1-week implied volatility measures are quite low as well, implying that a catalyst might be required for another push lower.

In turn, this may suggest that range bound trading plays might be appropriate in the short term, with the CPI reading a possible candidate for volatility.

USD/CAD 30-Min Chart (With the GSI Indicator): August 19, 2016

USD/CAD in Focus to Close the Trading Week With CPI Data on Tap

(Click to Enlarge)

The USD/CAD is at a potential interim resistance level at around the 1.2837 level at the time of writing, with GSI calculating slightly higher percentage of past movement to the downside in the short term.

The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns. By matching events in the past, GSI describes how often the price moved in a certain direction.

You can learn more about the GSI here.

Further levels of resistance might be 1.28675, followed by the area above 1.29, 1.2950, 1.2980 and the 1.30 handle.

Possible levels of support on a move lower may be 1.2800, 1.2766 the 1.27 handle and a zone below 1.2650.

We generally want to see GSI with the historical patterns significantly shifted in one direction, which alongside a pre-determined bias and other technical tools could provide a solid trading idea that offer a proper way to define risk.

We studied over 43 million real trades and found that traders who successfully define risk were three times more likely to turn a profit.

Read more on the Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 62.44% of traders are long the USD/CAD at the time of writing. The SSI is mainly used as a contrarian indicator implying weakness ahead.

You can find more info about the DailyFX SSI indicator here

--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com

Follow him on Twitter at @OdedShimoni

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


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