How To Trade The Canadian Retail Sales Report

[B]Trading the News: Canadian Retail Sales[/B]
[B][U]What is Expected[/U]
[/B]Time of release: [B]09/21/2007 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact : [B]USDCAD[/B]
Expected: [B]0.0%
[/B]Previous: -0.9%

[B]How To Trade This Event Risk[/B]
The Canadian retail sales report is perhaps the most market moving economic indicator in the loonie’s arsenal. To get an idea of the type of volatility the indicator can trigger we need only look back to May and April, where divergences between expectations and actual figures triggered 80 and 30 point moves in the five minutes after the releases respectively. Clearly, there is a correlation between surprise and price action, so a July sales report that is further off the mark will tend to generate a greater initial response; yet the follow through seems to be pretty gradual and consistent. Another factor to take into account is the wholesale sales release. Often times, the wholesale indicator is a strong predictor of the retail number. However, the market is starting to pick up on this correlation; so a surprise in the same direction as the wholesales report is growing dull while one that takes the opposite course produces an even more intense reaction. For Friday’s indicator, the market is ready with a positive wholesales surprise of 2.0 percent that was four times the market’s consensus. From that report it would be reasonable that strong spending on autos, personal goods and building materials can be transferred to the retail number; but the big jump in machinery spending isn’t likely to show up.
The July retail sales report already has a positive lean to it. The market consensus is calling for an unchanged month for sales (following a 0.9 percent contraction in the previous period) while the ex autos number is seen rising 0.3 percent. Further bending the market towards an upside surprise in the fundamentals, the strong wholesales figure has likely guided the unofficial outlook a little higher. Therefore, a strong spending number would need to see a considerable divergence to rally momentum - especially at current levels. Our strategy dictates a fundamental surprise would need to be accompanied by a five-minute red candle to trigger entry on a two lot position. An initial stop should be set near the swing high (or a reasonable fixed distance). The target on the first lot should equal risk and the second should be based on discretion (though it should be reasonable given USDCAD’s extreme position). Move stop to break even when the first lot takes profit.
A disappointing sales report could very well be the best opportunity for a strong event-risk trade. With expectations looking for no change and the wholesales report pointing north, a drop in retail receipts could catch a majority of the market off guard. What’s more, with USDCAD scraping its belly on multi-decade lows and testing the psychological parity point, a rebound could be potent.