Consumer prices in Canada are widely expected to weaken in July, with economists forecasting the annual rate of inflation to fall 0.8% from the previous year, and the downturn in price growth may lead the Bank of Canada to utilize tools beyond the interest rate as policymakers see a risk for a slower recovery.
[B][U]Trading the News: [/U][/B][B][U]Canada Consumer Price Index[/U][/B]
[B][/B]
[B][/B]
[B][U]What’s Expected[/U][/B][B][/B]
Time of release: [B]08/19/2009[/B][B] 11:00 GMT, [/B][B]07:00 EST[/B]
Primary Pair Impact[B] : USDCAD[/B]
Expected: -0.8%
Previous: -0.3%
[B][/B]
[B][/B]
[B][U]Effect the Canadian CPI had on USDCAD for the past 2 months
[/U][/B]
[U]June 2009 [/U][U]Canada[/U][U] Consumer Price Index[/U][U][/U]
The annual rate of inflation in Canada fell 0.3% in June to mark the first negative reading since 1994, and the outlook for price growth remains weak as the Bank of Canada forecast price pressures to hold below the 2% target until the second-half of 2011. Meanwhile, the breakdown of the report showed gasoline prices plunged 24% from the previous year to lead the decline, with the cost of transportation, housing clothing and footwear falling lower from 2008, and the central bank is widely expected to maintain a dovish policy stance into the first half of the following year in an effort to support a sustainable recovery. However, as BoC Governor Mark Carney sees a risk of a slower recovery following the appreciation in the exchange rate, the central bank may adopt policy tools beyond the interest rate in order to stem the downside risks for growth and inflation.
[U]
May 2009 [/U][U]Canada Consumer Price Index[/U]
Consumer prices in Canada unexpectedly rose in May, with the annualized rate rising 0.1% from the previous year however, the outlook for inflation remains bleak weak as the nation faces a deepening downturn. At the same time, the core rate of inflation increased to 2.0% from 1.8% in April, driven by a 2.7% rise in transportation costs, and the sudden rise in the cost of living could hamper the outlook for future growth as households face a weakening labor market paired with tightening credit conditions. Meanwhile, the Bank of Canada anticipates price pressures to weaken further this year, and expects inflation to hold below the 2% target until 2011 as economic activity falters. As a result, Governor Mark Carney pledged to keep the benchmark interest rate the record low throughout the following year, and policymakers take further steps to jump-start the economy as the outlook for growth and inflation remains bleak.
[B]
What To Look For Before The Release[/B][B][/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:
[B][U]Bullish Scenario:[/U][/B][B][U][/U][/B]
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 CAD against the US 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.
[B][U]Bearish Scenario:[/U][/B]
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 CAD against the US 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.
[B]
How To Trade This Event Risk[/B]
Consumer prices in Canada are widely expected to weaken in July, with economists forecasting the annual rate of inflation to fall 0.8% from the previous year, and the downturn in price growth may lead the Bank of Canada to utilize tools beyond the interest rate as policymakers see a risk for a slower recovery. A report by Statistics Canada showed economic activity contracted for the tenth consecutive month in May as businesses continued to scale back on production and employment, while manufacturing shipments plunged 6.0% to C$38.4B during the same period, which is the lowest since November 1998. Moreover, wholesale demands dropped for the eighth consecutive month in May to reach the lowest level since December 2005, while new motor vehicle sales declined 0.6% in June, and the downturn in private-sector spending is likely to hamper the outlook for growth and inflation as households face a weakening labor market paired with tightening credit conditions. At the same time, the International Monetary Fund raised its growth forecast and projects the economy to contract at an annual pace of 2.3% versus an initial forecast for a 2.5% drop in GDP, and the improved outlook held by the group may continue to support the appreciation in the Canadian dollar as the IMF anticipates the growth rate to rise 1.6% in 2010. Meanwhile, the Bank of Canada held the benchmark interest rate at 0.25% in July and pledged to keep borrowing costs at the record-low ‘until the second quarter of 2010’ as the board maintains its dual mandate to ensure price stability while fostering full-employment. Furthermore, the central bank raised its growth forecast and expects economic activity to contract at an annual rate of 2.3% this year amid an initial projection for a 3.0% drop in GDP, while the bank anticipates inflation to move back into its target range sooner than expected as the outlook for future growth improves. However, policymakers argued that ‘the high Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth,’ and continued to reiterate that ‘the bank retains considerable flexibility in the conduct of monetary policy at low interest rates.’ As the BoC holds a dovish outlook for inflation and see a risk for a slower recovery, the policymakers may take additional steps to shore up the ailing economy, and fears for a double-dip recession could weigh on the exchange rate over the near-term as investors weigh the outlook for future policy.
A weakening outlook for inflation favors a bearish outlook for the Canadian dollar as the Bank of Canada maintains a dovish policy stance but nevertheless, price action following an enhanced CPI report could set the stage for a long loonie trade. Therefore, if the annual rate of price growth falls 0.3% or less from the previous year, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of USD/CAD. Once these conditions are met, we will place our initial stop at the nearby swing high (or a reasonable distance taking volatility into account), and this risk will establish our first target. Our second objective will be based on discretion, and will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
In contrast, the downturn in global trade paired with the slump in economic activity is likely to weigh on consumer prices, and price pressures are likely to remain subdued throughout the second-half of the year as the region faces its worst economic downturn in over a decade. As a result, if the annual rate of inflation falls 0.8% or greater from the previous year, we will favor a bearish outlook for the Canadian dollar, and will follow the strategy for a long dollar-loonie trade as the short position mentioned above, just in reverse.
[I][B]Visit the [/B][/I][I][B]DailyFX Forex Stream[/B][/I] [I][B]for Real-Time News and Market Updates[/B][/I]