Will a Rebound In Growth Fuel Loonie Bulls?

[DailyFx]

Trading the News: Canadian Gross Domestic Product

What’s Expected
Time of release: 05/30/2008 12:30 GMT, 08:30 EST
Primary Pair Impact : USDCAD
Expected: 0.0%
Previous: -0.2%







How To Trade This Event Risk

The March GDP release will be reinforced by the quarterly reading, which may make it more market moving. Economist are predicting that growth remained flat in March after a 0.2% decline the month prior, with the aggregate first quarter slowing to 0.4% from 0.8% the quarter prior. Governor Carney stated following last month’s release that exports would weaken going forward but domestic demand would remain firm. Indeed, consumer consumption has remained resilient with retail and wholesale sales rebounding in March 0.1% and 0.6% respectively, from declines the month prior. However, exports surprisingly rose in March, as demand from the U.S. increased for the third month in a row. The value of energy exports advanced for the fifth straight month as the natural resource rich country has benefited from record oil prices that have reached over $130 a barrel. Rising fuel costs have stoked inflation globally with Canada realizing its first acceleration in prices in five months of 1.7% from 1.4% in March. Therefore, the BoC is expected to follow the Fed in pausing rates as inflation concerns mount and the credit crisis begins to abate. The central bank recently cut in half the amount of liquidity it was providing the financial system to $1 billion as market conditions have improved. Also, Traders should be aware that U.S. data crossing the wires at the same time as the growth reading in the form of personal spending and income may provide dollar bearish sentiment as both are expected to decline.

The strength of the Canadian labor market and robust demand for natural resources makes it very likely that the growth measure may surprise. This would further the case for loonie bulls, who have keep the pair below parity since May 19. When looking for a long Canadian dollar position (short USDCAD), we will look for data that suggests the economy is immune to a U.S slowdown and the BoC can pause its current easing monetary policy. A consecutive positive reading would validate the economy’s resiliency, therefore we would look for another month of growth with a better than expected . If we have this bullish fundamental mix, we will look for a red, five-minute candle to confirm entry on two lots of USDCAD at market. Our stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise) and the first lot’s target will be immediately set equal to this initial risk. The second target will be determined by discretion. To preserve profit, we will move the stop on the second lot to breakeven when the first takes profit.

Alternatively, a consecutive month of a contraction will diminish the growth outlook with inflation starting to sap consumers purchasing power. For a short we will look for a growth to remain flat or slightly improved and follow the same setup as the short, just in reverse.