For the past two months, we have been unable to trade the Canadian retail sales report due to conflicting economic indicators that threatened to disrupt the reaction to the consumption indicators. In December, a monthly GDP number posed a modest threat to market movement and fundamental focus. The January release was certainly a no go through as the Bank of Canada was announcing a 25 basis point rate cut on the same day and at the same time as the retail sales report was scheduled to print. And, between these two fundamental pulls, a rate decision will win almost every time.
[B][U]Trading the News: Canadian Retail Sales[/U][/B]
[U][B]What’s Expected[/B][/U] Time of release: [B]02/22/2008 13:30 GMT, 08:30 EST[/B] Primary Pair Impact : [B]USDCAD[/B] Expected: 0.80% Previous: 0.70%
[B][U]Effect the Canadian retail sales report had on USDCAD over the past 3 months[/U][/B]
[B]Period[/B] [B]Data Released[/B] [B]Estimate[/B] [B]Actual[/B] [B]Pips Change[/B] [B]Pips Change[/B] [B](1 Hour post event )[/B] [B](End of Day post event)[/B] Nov 2007 01/22/2008 13:30 GMT 0.2% [B]0.7%[/B] 14 -19 Oct 2007 12/21/2007 13:30 GMT -0.4% [B]0.1%[/B] -3 -64 Sep 2007 11/21/2007 13:30 GMT 0.0% [B]-0.2%[/B] -12 -13
[U]November 2007 Canadian Retail Sales[/U]
On January 22nd, event traders would have had a hard time trading the monthly retail sales report. The November reading for purchases certainly met the necessary criteria for a fundamentally-based trade. According to Statistics Canada’s data, retail sales rose 0.7 percent – well above the 0.2 percent improvement expected and the 0.1 percent reading from the previous month. What’s more, with a 1.7 percent jump, the ex-autos figure marked the biggest jump for the gauge in months. Nonetheless, we would not have traded this release had we been following it for a potential event-risk trade. Heading into the release, the market was well aware of the BoC’s rate decision scheduled for same time and which happened to result in a quarter point rate cut.
[U]October 2007 Canadian Retail Sales[/U]
Consumer spending was expected to contract the most in three months through October according to economists’ estimates for the October retail sales report. However, against the 0.4 percent drop in sales expected, the indicator instead printed a 0.1 percent pickup. While this was a modest change for the month, it did also measure up to a 0.2 percent decline in sales over the previous month. However, like the situation that would surround the November report the following month, there was interference for fundamental traders to deal with in making their trade from an October GDP release. However, with both indicators printing better than expected, a short trade would have been profitable – though we were not trading this event risk in December.
[U]September 2007 Canadian Retail Sales[/U]
Once again, the volatile wholesale sales report had set traders up for a let down from the indicator’s retail counterpart. According to Stats Canada’s November 21st release, spending in the retail sector slipped 0.2 percent against expectations of no change. However, the wholesale report had set the tone for something completely different as two days prior it had diverged considerably from expectations as activity turned from a 2.0 percent contraction to a 1.1 percent increase – against expectations of no change. We were watching this indicator for a fundamental trade. However, we were looking for a large change in sales to offer a fundamental trigger for a trade. Considering the tepid release, we remained on the sidelines for the release.
[B]How To Trade This Event Risk[/B]
For the past two months, we have been unable to trade the Canadian retail sales report due to conflicting economic indicators that threatened to disrupt the reaction to the consumption indicators. In December, a monthly GDP number posed a modest threat to market movement and fundamental focus. The January release was certainly a no go through as the Bank of Canada was announcing a 25 basis point rate cut on the same day and at the same time as the retail sales report was scheduled to print. And, between these two fundamental pulls, a rate decision will win almost every time. However, looking at this Friday’s release, conditions look more or less optimal for an event risk trade based on the December retail sales report. The Canadian economic calendar is empty, except for the consumption number. What’s more, the US docket will be empty as well, so there will be no cross exchange waves. As for fundamental potential, this sales report will no doubt be judged for its influence on overall growth trends and, by association, interest rate expectations. With the US economy teetering on the verge of economic contraction and possibly even a recession, many market participants are watching to see whether Canada can avoid the pull of its largest trade partner. Outside of consumer spending, December was a disappointing month for the economy with the Ivey business activity gauge falling to its worst level since 2001 and the trade balance marking its smallest surplus in nine years. Signs that the consumer is faltering would certainly threaten growth; and with inflation far more tame than its US cousin, the BoC could be looking at a strong argument for a consistent easing policy or even deeper cuts at each meeting.
Coming on the top market moving economic release for the week, USDCAD is in a good technical position for a response to a surprise to either the up or downside. For a long Canadian dollar position (short USDCAD), we will look for an upside surprise of at least 0.2 percent (a reading of 1.0 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 disappointment with trade and business activity struggling through the same period and the wholesales report seeing its biggest drop in over a year. However, this will only work to leverage an upside surprise. 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 more dovish policy stance 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.