Consumer prices in Canada are expected to rise to an annualized pace of 1.8% in January, which is just shy of the 2% target held by the central bank, and the rebound in price growth is likely to stoke expectations for a rate hike as the Bank of Canada aims to normalize policy this year.
[U][B]Trading the News: Canada Consumer Price Report[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: 02/18/2010 12:00 GMT, 07:00 EST
Primary Pair Impact : USDCAD
Expected: 1.8%
Previous: 1.3%
[U][B]Impact the Canada Consumer Price Report has had on USDCAD over the last 2 months[/B][/U]
[U]December 2009 Canada Consumer Price Report[/U]
Price growth in Canada improved less than expected in December, with the headline reading for inflation climbing an annualized 1.3% after pushing 1.0% in November, Statistics Canada announced today in Ottawa. At the same time, consumer prices slid 0.3% during the month subsequent to adding 0.5% the previous month. Indeed, the reading is below the 2% central bank target of inflation, primarily due to lower costs for mortgage interest, natural gas and clothing. Indeed, the Bank of Canada kept its benchmark interest rate unchanged at 0.25%, and are likely to kept this rate unchanged going through June. Meanwhile, central bank Governor said he plans to keep the rate at its current level unless the outlook for prices veers from his forecast. At the same time, the policy makers stated that “considerable excess supply remains” and inflation will not return to policy makers 2% target until the third quarter 2010. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.17_TTN2.jpg[/IMG] [U]November 2009 Canada Consumer Price Report[/U]
Consumer prices in Canada advanced an annualized 1.0% in November after climbing 0.1% the month prior, with economists’ expectations of 0.8%, the Statistics Canada announced in Ottawa. The better-than-expected reading marks its fastest pace in eight months as the decline in gasoline costs linked to the global recession comes to a halt. Looking at the breakdown of the report, retail gasoline prices rose 14% in November from the previous year, while housing was the only major component out of the eight to decline during the same period. Meanwhile, Bank of Canada governor Mark Carney reiterated that he plans to keep his benchmark interest rate at a record low of a quarter of a percent through June in order to fuel the economy, and to bring inflation to the two percent target by the second half of 2011. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/02.17_TTN3.jpg[/IMG] [B]What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[U][B]Bullish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release. [U][B]Bearish Scenario:[/B][/U]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release. [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00001_CAD.jpg[/IMG] [IMG]http://forums.babypips.com/export/story-images/2010/02/fundamental/daily_briefing/daily_pieces/trading_news_reports/00002_CAD.jpg[/IMG] [B]How To Trade This Event Risk [/B]
Consumer prices in Canada are expected to rise to an annualized pace of 1.8% in January, which is just shy of the 2% target held by the central bank, and the rebound in price growth is likely to stoke expectations for a rate hike as the Bank of Canada aims to normalize policy this year. A report by Statistics Canada showed economic activity expanded for the third consecutive month in November, with the growth rate increasing 0.4% from the previous month to top forecasts for a 0.3% rise, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy. Moreover, employment increased 43.0K in January, which pushed the jobless rate down to 8.3% from a revised 8.4% in November, while home prices increased for the sixth month in December. The data reinforces an improved outlook for growth and inflation as policy makers aim to encourage a sustainable recovery, and a rise in price pressures could lead the BoC to tighten policy going into the second-half of the year as the board maintain its mandate to balance the risks for the economy.
However, a separate report showed prices for industrial products unexpectedly slipped 0.1% in December, while the cost of raw materials tumbled 1.7% during the same period, and the ongoing slack in the private sector may keep a lid on inflation as BoC Governor Mark Carney sees the “new normal” for real growth to average 2.0% in 2011. Mr. Carey said that growth beyond 2.0% “is not yet a realistic prospects” as businesses maintain a lower level of production and employment, and noted that productivity “has been relatively disappointing in recent years.” As the central bank forecasts growth to fall back to 2.2% by the end of the following year, the BoC is likely to maintain its pledge to keep borrowing costs at the record-low of 0.25% throughout the first-half of 2010, and may hold a dovish outlook for future policy as the marked appreciation in the Canadian dollar continues to dampen the extraordinary efforts taken on by the government.
Increased price growth favors a bullish outlook for the loonie as the Bank of Canada aims to tighten policy in the second-half of the year, and price action following the report could set the stage for a long Canadian dollar trade as the economy returns to growth. Therefore, if the headline reading for inflation increases to 1.8% or higher, we will need to see a red, five-minute candle following the release to confirm a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing high or a reasonable distance, and this risk will be used to determine of initial target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to lock-in our profits.
On the other hand, the marked appreciation in the exchange rate may continue to weigh on the private domain, and a dismal inflation report is likely to drag on the Canadian dollar as the BoC maintains a dovish outlook for future policy. As a result, if consumer prices rise to an annual pace of 1.5% or lower, we will favor a bullish outlook for the USD/CAD, and will follow the same strategy for a long dollar-loonie trade as the short position mentioned above, just in reverse.
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[I]
To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]