[B]Trading the News: Canadian International Merchandise Trade[/B]
[B]What is Expected[/B]
Time of release: [B]11/09/2007 13:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B]USDCAD[/B]
Expected: [B]C$3.9B[/B]
Previous: C$4.1B
[B]
How To Trade This Event Risk[/B]
Few traders have missed the Canadian dollar’s strength – whether they trade the currency or not. In the past months and years, the loonie has rallied to record highs, and then on to and through parity, against the dollar. However, the extreme move has brought along its fair share of paranoid market participants. Whether its traders trying to catch a bottom or those that caught a significant swath of the downside action and are merely worried that there profits are going to be eaten up on a retracement, there is a tangible tension in the market as participants wait for the inevitable, deep rebound for USDCAD. And, in looking for the trigger for such a move, we look to fundamentals. On the way down, rising commodity prices and consistently stronger Canadian data have provided momentum. However, with the currency on the rise, the burden for economic activity only grows. While the expensive Canadian dollar has yet to genuinely cool the economy, it is only a matter of time. The manufacturing sector has already been delivered a considerable blow by the unfavorable exchange rate, and the trade balance will likely follow suit when commodity demand wanes. For the September balance, higher commodity prices were certainly a factor, yet a drop in activity and orders for Canadian businesses and a more frugal US consumer over the same period likely impacted trade. As for interference from competing event risk, only the US trade balance and import inflation readings are on deck, indicators that have lost most of their fundamental influence. What’s more, expectations are very close to the previous month, setting up a good surprise.
A loonie-positive outcome for this data would clearly come from a stronger than expected surplus. While commodity prices were firmer in September, most of their major gains have been recorded in October; so a strong number outside of commodities influence could be deemed more meaningful. A widening, positive trade gap would suggest that the economy has a consistent engine in trade and that the world will tolerate a record high Canadian dollar. Furthermore, a short USDCAD should not be encumbered by a disappointing breakdown (big drop in imports and exports) or strong US data. Alternatively, if these factors work in the trade’s favor, all the better. With a strong event risk, we will look for a five minute red candle and go short two lots at market when said bar closes. Our stop will be at the nearby high (or reasonable distance) and the target on the first lot will equal the risk on a single lot. The second target will be based on discretion, and to conserve profit, we will move our stop to breakeven when the first half of the trade takes profit.
With USDCAD already threatening to extend a rebound from recent exhaustion low despite rising crude and gold prices, a fundamental trigger could set off a breakout above resistance. We will use the same trading rules for a short as for the long, just in reverse.
