Can the Loonie Find Support From Strong Consumer Spending?

This month’s retail sales release will not present as optimal an event risk trade as December’s print. The U.S. calendar presents some noise which may dilute the overall affects of the consumption indicator. The main culprit will be the U.S. consumer confidence number, which is expected to show deteriorating sentiment in Canada’s main trading partner, additionally housing and manufacturing data in the form of S&P/Case Shiller House prices and Richmond Fed Manufacturing will give insights into two of the weaker sectors of the U.S. economy. Despite continuing signs that the U.S. is entering into a recession, their neighbors to the north have showed signs of resiliency and an ability to prevent being pulled into a similar fate.</u></strong>
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[B][U]What’s Expected[/U][/B]
Time of release: [B]03/25/2008 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact[B] : USDCAD[/B]
Expected: 1.4%
Previous: 0.6%

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How To Trade This Event Risk[/B]
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This month’s retail sales release will not present as optimal an event risk trade as December’s print. The U.S. calendar presents some noise which may dilute the overall affects of the consumption indicator. The main culprit will be the U.S. consumer confidence number, which is expected to show deteriorating sentiment in Canada’s main trading partner, additionally housing and manufacturing data in the form of S&P/Case Shiller House prices and Richmond Fed Manufacturing will give insights into two of the weaker sectors of the U.S. economy. Despite continuing signs that the U.S. is entering into a recession, their neighbors to the north have showed signs of resiliency and an ability to prevent being pulled into a similar fate. The labor market coming of a year where it added 300,000 jobs has continued to show strength adding over 43,000 jobs in February. As more Canadians earn paychecks, consumer confidence continues to grow and in turn domestic spending remains robust. Therefore, consumers are expected to increase their spending for a fourth straight month. In addition to a strong labor market, the commodity driven economy saw rebounds in manufacturing and exports as both the Ivey PMI and International Merchandise Trade improved in February. However, the BoC recent greater than expected 50 point rate cut shows that they are concerned of the long-term affects of the U.S. downturn. A disappointing retail sales print for the second consecutive month will justify the MPC’s concerns and support the natural assertion that a slumping U.S. is weighing on Canadian consumer confidence.

Despite the broad dollar strength and recent commodity sell off a stronger than expected consumer spending reading could generate strong Loonie support. For a long Canadian dollar position (short USDCAD), we will look for an upside surprise of at least 0.2 percent (a reading of 1.6 or better) with support from the ex autos report that suggests the change was not merely the reflection of volatile vehicle sales. Fundamentally, the market is biased towards a surprise with trade and business activity surprising through the same period and the wholesales report seeing its biggest increase in over a year. With a positive bias from the data, we will look for a five-minute, red bar to confirm short entry on two lots of USDCAD. Our initial stop will be set at the nearby swing high (or reasonable distance) and our first profit target will equal this risk. The second objective will be based on discretion (taking mind to major support) ; but to preserve profit, we will move the stop on the second lot when the first half of the trade hits its target.

Alternatively, given the high expectations for the retail report and growing fears of a downturn in growth and a the recent surprise move from the BoC, a downside surprise may be more volatile. We will use the same strategy for a long as we laid out for a short, just in reverse.