Retail spending in Canada is expected to increase for the fourth consecutive month in April, with economists forecasting a 0.3% rise in domestic demands, and speculation for a marked recovery next year may continue to drive the Canadian dollar higher as investors weigh the outlook for future policy.
[U][B]Trading the News: Canadian Retail Sales
Time of release: [B]06/19/2009 12:30 GMT, 08:30 EST[/B]
Primary Pair Impact: [B]USDCAD[/B]
[U][B]Effect the Canadian Retail Sales had on USDCAD for the past 2 months[/B][/U]
[B]Period[/B] [B]Data Released[/B] [B]Estimate[/B] [B]Actual[/B] [B]Pips Change[/B] [B](1 Hour post event )[/B] [B]Pips Change[/B] [B](End of Day post event)[/B] Mar 2009 05/22/2009 12:30 GMT 0.5% [B]0.3%[/B] +48 -29 Feb 2009 04/23/2009 12:30 GMT -0.3% [B]0.2%[/B] +23 -117
[U]March 2009 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.
[U]February 2008 Canada Retail Sales[/U]
Retail sales in Canada rose for the second consecutive month in February as household consumption unexpectedly increased 0.2% from the previous month, while sales excluding autos beat expectations for a 0.2% rise as the index jumped 0.6% from January. A deeper look at the report showed building supplies led the advance as demands surged 3.0% during the month, which was followed by a 1.7% increase in gasoline receipts, while discretionary spending on food and drinks grew 0.7% from January. The data encourages an improved outlook for the world’s eighth largest economy as the Bank of Canada pledges to hold the benchmark interest rate at the record low for more than a year to stimulate the economy however, as the central bank lowers its growth forecast and expects the annual rate of growth to contract 3.0% this year, conditions are likely to get worse as households face a weakening labor market.
[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 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. [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 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.
How To Trade This Event Risk [/B]
Retail spending in Canada is expected to increase for the fourth consecutive month in April, with economists forecasting a 0.3% rise in domestic demands, and speculation for a marked recovery next year may continue to drive the Canadian dollar higher as investors weigh the outlook for future policy. Credit Sussie overnight index swaps shows market participants anticipate the Bank of Canada to tighten policy over the next 12 months as growth prospects improve, and long-term expectations for higher interest rates may continue to strengthen the domestic currency as investors raise their appetite for risk. At the same time, the Bank of Canada pledged to maintain the benchmark interest rate the record-low until the second-half of 2010, and went onto say that ‘the bank retains considerable flexibility in the conduct of monetary policy at low interest rates’ as policymakers expect the recover to be ‘more muted than usual.’ The dovish comments from the BoC suggests the central bank is willing to take further steps in an effort to jump-start the economy as the outlook for growth and inflation remains bleak, and the downturn is global trade is likely to weigh on economic activity going forward as businesses continue to scale back on production and employment. A report by Statistics Canada said the world’s eighth-largest economy lost 41.8K jobs in May, with the jobless rate rising to an 11-year high of 8.4%, while the 1Q GDP reportshowed economic activity fell at its fastest pace since 1991 following the downturn in global demands. Moreover, the capacity utilization rate fell to its lowest level since recordkeeping began in 1987 during the three-months through March, while the trade balance unexpectedly slipped to -0.2B in April, driven by a 5.1% drop in exports, and the data encourages a weakening outlook for the region as economic activity falters. Nevertheless, the BoC expressed concerns regarding the rapid appreciation in the nation’s currency throughout the second-quarter, stating that the rise ‘reflects a combination of higher commodity prices and generalized weakness in the U.S. currency,’ which could hinder the prospects for future growth. As the central bank maintains the scope to ease policy further, fears of a protracted recession may continue to weigh on the exchange rate however, the Canadian dollar may continue to benefit from the rise in market sentiment.
Trading the given event risk favors a bullish outlook for the Canadian dollar as economists anticipate household spending to increase for the fourth month in April, and price action following the release could set the stage for long loonie trade. Therefore, and in-line print or a rise of more than 0.3% would lead us to look for a red, five-minute candle subsequent to the report 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 taking volatility into account, and this risk will determine our first target. Our second objective will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
On the other hand, fading demands for employment paired with tightening credit conditions may lead households to cut back on consumption as the outlook for future growth remains bleak, and a dismal sales report could weigh on the exchange rate as the central bank forecasts the economy to contract at an annual pace of 3.0% this year. As a result, if retail sales unexpectedly fall 0.2% or more in April, we will favor a bearish outlook for the Canadian dollar, and will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.