[B]Trading the News: Canadian Gross Domestic Product[/B]
[B][U]What is Expected[/U][/B]
Time of release: [B]09/28/2007 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B]USDCAD
[B]How To Trade This Event Risk[/B]
Though the monthly Canadian GDP releases have historically been rather reliable in their ability to drive fundamental currents in the loonie, last month?s report has cast some doubt on the indicators effectiveness. The otherwise perfect storm of an upside surprise in both the June and second quarter figures would theoretically give USDCAD considerable downside momentum. As it happens, this was not the case last month. However, the market?s interest in growth numbers has been revived recently as the Canadian dollar has continued its push higher and reached the parity milestone. When the 1.00 was broken, politicians, union leaders and economists turned their audible grumbles to loud cries of disbelief and support. Finance Minister Jim Flaherty addressed the public by stating the USDCAD?s exchange rate was less a reflection of Canadian fundamentals and more a product of the struggling greenback. Should economic growth miss expectations, it may be taken as a sign that fading growth in the US is starting to cross the border and encourage long-term loonie bulls to start unwinding their positions. Alternatively, an unflappable trend of expansion may suggest the Canadian economy is immune to the US?s cold; and parity is more than justified.
An upside surprise in the July GDP number may offer perennial USDCAD bears reason to stick with their trades and look for a permanent stay down below parity. However, we wouldn?t look to take such a strong bias in such an event. A strong GDP figure and a five minute red bar (with some evidence of increased volatility for a possible guide to momentum) would trigger a short trade on two lots with an initial stop set at the nearby swing high (if this is too far away, a reasonable fixed distance should be substituted). The first half of the trade should have a target equal to risk while the second should be based on discretion. When projecting the second objective, take into consideration momentum and the proximity of the 32-year low. When the first lot makes profit, move stop on the second to break even.
The same entry criteria and trade maintenance laid out for the short strategy would apply to a potential long USDCAD trade. One considerable difference though is the consideration for the discretionary profit potential. Considering the fundamental importance of a strong Canadian economy and the overextended loonie, a rally could prove strong.