The Canadian dollar may face increased selling pressure during the last full-week of August as economists forecast retail sales to fall 0.1% in June, and the data is likely to reinforce a weakening outlook for future policy as growth and inflation remains weak.
[B][U]Trading the News: Canadian Retail Sales[/U][/B][B][U][/U][/B]
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[B][U] What’s Expected[/U][/B][B][/B]
Time of release: [B]08/24/2009 12:30 GMT, [/B][B]08:30 EST[/B]
Primary Pair Impact[B] : USDCAD[/B]
Expected: -0.1%
Previous: 1.2%
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[B][U] Effect the Canadian Retail Sales had on USDCAD for the past 2 months[/U][/B]
[U]May 2009 [/U][U]Canada[/U][U] Retail Sales[/U][U][/U]
Household spending in Canada surged 1.2% in May, topping expectations for a 0.5% rise, and the data encourages an enhanced outlook for future growth as policymakers anticipate economic activity to improve throughout the second-half of the year. The breakdown of the report showed automotive sales jumped 2.4% from April, with gasoline receipts increasing 0.9%, while discretionary spending on food and beverages rise 0.7% from the previous month. Meanwhile, the Bank of Canada raised its growth forecast for the world’s eighth largest economy in July and projects GDP to contract at an annual pace of 2.3% this year amid an initial forecast for a 3.0% drop in April, and the improve outlook held by the central bank may continue to push the Canadian dollar higher over the near-term as investors anticipate the BoC to tighten policy over the next 12 months.
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April 2008 [/U][U]Canada 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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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]
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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 face increased selling pressure during the last full-week of August as economists forecast retail sales to fall 0.1% in June, and the data is likely to reinforce a weakening outlook for future policy as growth and inflation remains weak. 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, with the economy losing44.5K jobs in July, fears of a slower recovery may lead policymakers to take additional steps to shore up the ailing economy as Finance Minister Jim Flaherty anticipates job losses to intensify for ‘some months.’ Nevertheless, wholesales sales increased 0.6% in June amid expectations for a 0.2% rise, while new motor vehicle sales fell at a slower pace than initial expected during the same period, and an unexpected rise in private consumption could drive the Canadian dollar higher against its currency counterparts as growth prospects improve. Meanwhile, the Bank of Canada kept 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 April, while the board anticipates inflation to move back into its target range sooner than expected as the outlook for future growth improves. As a result, Credit Suisse overnight index swaps are up 100bp in August and expectations for higher borrowing costs in 2010 favors a bullish outlook for the loonie as market sentiment 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 central bank may take additional steps to shore up the ailing economy, and fears of a double-dip recession could weigh on the exchange rate over the near-term as investors weigh the outlook for future policy. Nevertheless, as risk trends continue to dictate price action in the currency market, the rebound in risk appetite may continue to support Canadian dollar as traders move into higher yielding assets.
Trading the given event risk favors a bearish forecast for the Canadian dollar but nevertheless, price action following an enhanced retail sales report could set the stage for a short dollar-loonie trade. Therefore, if household spending unexpectedly rises 0.2% or more in June, 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 low (or a reasonable distance), and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop to breakeven once the first trade reaches its target in an effort to preserve our profits.
On the other hand, fading demands for employment paired with fears of a slower recovery may lead households to increase their savings rate as the economic outlook remains uncertain, and a dismal sales report is likely to stoke increased selling pressures on the Canadian dollar as growth and inflation falter. As a result, if household consumption falls 0.1% or greater from the previous month, we will favor a bearish forecast for the 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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