The Canadian dollar may continue to appreciate against its currency counterparts as economists forecast retail sales to rise 0.5% in May, and expectations for an economic recovery later this year may continue stoke demands for higher risk/reward investments as market sentiment improves.
[B][U]Trading the News: Canadian Retail Sales
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[B][U]What’s Expected[/U][/B]
Time of release: [B]07/22/2009[/B][B] 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact[B] : USDCAD[/B]
Expected: 0.5%
Previous: -0.8%
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[B][U]Effect the Canadian Retail Sales had on USDCAD for the past 2 months[/U][/B]
[U]April 2009 [/U][U]Canada[/U][U] Retail Sales[/U]
Retail sales in Canada unexpectedly fell 0.8%in April to mark the first decline in four months, and households may continue to scale back on consumption as they face a weakening labor market paired with fears of a protracted downturn. A deeper look at the report showed gasoline receipts tumbled 1.9% following the rise in crude prices, with discretionary spending on food and beverages slipping 1.0% from March, while demands for clothing slumped 0.6% during the month. The data encourages a weakening outlook for private-sector spending as the unemployment rate holds at an 11-year high of 8.4%, and growth prospects are likely to remain subdued throughout the second half of the year as firms continue to scale back on production and employment in an effort to weather the downturn in global trade. As a result, the Bank of Canada may continue to ease policy further in the coming months in order to steer the nation out of the recession.
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March 2008 Canada Retail Sales[/U]
Consumer spending in Canada increased for the third month in March, with retail sales increasing 0.3% from the previous. The breakdown of the report showed sales excluding autos fell 0.2% during the month as car purchases increased 0.5%, with gasoline receipts falling 2.8%, while discretionary spending on food and beverages rose 0.9% from February. Despite the pickup in domestic consumption, fading demands for employment paired with fears of a protracted downturn is likely to weigh on households throughout the year, and growth prospects may continue to deteriorate further as trade conditions deteriorate. As a result, the Bank of Canada is widely expected to hold borrowing costs at the record-low into the following year, and may adopt policy tools beyond the interest rate later this year in an effort to jump-start the economy.
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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:
[B][U]Bullish Scenario:[/U][/B]
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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.
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How To Trade This Event Risk[/B]
The Canadian dollar may continue to appreciate against its currency counterparts as economists forecast retail sales to rise 0.5% in May, and expectations for an economic recovery later this year may continue stoke demands for higher risk/reward investments as market sentiment improves. However, as households face a weakening labor market paired with tightening credit conditions, fears of a protracted downturn could lead consumers to cut back on spending, and a drop in private consumption is likely to drag on the exchange rate as investors weigh the outlook for a sustainable recovery. A report by Statistics Canada showed economic activity contracted for the ninth consecutive month in April, while the trade deficit rose to a record-high of C$1.42B in May, driven by a 6.9%% drop in exports, and the slump in global trade is likely to hamper the outlook for future growth businesses continue to face fading demands from home and abroad. Moreover, a separate report showed manufacturing shipments plunged 6.0% to C$38.4B in May to mark the lowest reading since November 1998, while wholesale demands slumped for the eighth month during the same period, and the data reinforces a weakening outlook for private-sector spending as domestic demands falter. At the same time, the International Monetary Fund raised its growth forecast and projects economic activity 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 drive the Canadian dollar higher going forward 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% this month and pledged to keep borrowing costs at the record-low ‘until the second quarter of 2010’ as central bank maintains its dual mandate to ensure price stability while fostering full-employment. In addition, the BoC raised its growth forecast this month 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 growth prospects improve. However, the board 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 policymakers hold a dovish outlook for inflation and see a risk for protracted downturn, the central bank may take additional steps to shore up the economy, and speculation for further easing could weigh on the exchange rate over the near-term. Nevertheless, as risk trends continue to drive price action in the currency market, a rise in risk appetite could lead the Canadian dollar higher as market sentiment improves.
Expectations for a rise in retail sales favors a bullish outlook for the Canadian dollar, and price action following the release could set the stage for a short dollar-loonie trade as growth prospects improve. Therefore, if household spending rises 0.5% or more in May, we will look for a red, five-minute candle subsequent to 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 reasonable distance), and this risk will establish our first 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 preserve our profits.
In contrast, the unexpected drop during the previous month paired with the slump in domestic demands has left the door open for a dismal sales reading, and fears of a protracted downturn could weigh on the Canadian dollar as investors weigh the outlook for future growth. As a result, if retail sales drop 0.2% or more in May, we will favor a bearish outlook for commodity currency, and will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.
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