Canadian consumer prices are forecasted to have fallen in September to -0.9% from -0.8% as they return to July levels. A strong Canadian dollar has dampened import prices which is anchoring broader inflation.
Trading the News: Canada Consumer Price Report
What’s Expected
Time of release: 10/16/2009 11:00 GMT, 07:00 EST
Primary Pair Impact : USDCAD
Expected: -0.9%
Previous: -0.8%
Impact the Canada Consumer Price Report has had on USDCAD over the last 2 quarters
| August Canada Consumer Price Report Canada’s consumer prices fell more than economists expected in August as gasoline costs plunged. Inflation fell 0.8 percent in August from a year earlier, after July’s 0.9 percent drop that was the biggest since 1953, Statistics Canada said today in Ottawa. Forecasts were for a 0.7 percent decline, based on the median of 20 estimates. The core rate of inflation fell to 1.6 percent from 1.8 percent in July as food costs fell 0.7% during the month. The BoC has already committed to keeping rates at their current record low 0.25% until mid-2010 unless inflation expectations rise. Prevailing risk aversion and a bearish “loonie” reaction to the data would have triggered a long USD/CAD trade. A lack of follow through would have limited profits to 25 pips. July Canada Consumer Price Report Canadian consumer prices posted a second consecutive annual decrease last month, falling the most since 1953 and giving the Bank of Canada scope to honor its commitment to keep the key lending rate unchanged until June 2010. The consumer price index fell 0.9 percent in July from a year earlier on lower energy costs. The index fell 0.3 percent from the previous month as transportation costs dropped 1.6%. The core reading slipped to 1.8% from 1.9% the month prior which would add to the case to maintain an accommodative stance. Despite the bearish loonie data the USD/CAD saw very little reaction. Prevailing optimism over the potential for a global recovery had fueled risk appetite and strong support for the Canadian dollar. |
What To Look For Before The Release
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:
How To Trade This Event Risk
Canadian consumer prices are forecasted to have fallen in September to -0.9% from -0.8% as they return to July levels. A strong Canadian dollar has dampened import prices which is anchoring broader inflation. The decline is somewhat surprising given that there is typically a seasonal impact during the month from rising tuition costs. The continued disinflation will allow the BoC to stick with their timetable of refraining from tightening until at least the end of the second quarter of 2010. However, an upside surprise is a strong possibility considering the potential seasonal influences and the robust job growth in the country over the last few months. If an improving labor market gives rise to wage growth and increased consumer demand then retailers may have been able to raise prices. The Canadian dollar has been well supported and the prospect of a rate hike could add to prevailing bullish sentiment. However, a drop in prices may convince traders that Canadian yields will be the laggard in the tightening race reversing recent appreciation.
The reigning support for the loonie may not need much incentive to continue and signs that inflation is returning could send it to parity against the greenback. Therefore, if CPI fall less than 0.7% we will look for a red, five-minute candle following the inflation report to establish 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 we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
On the other hand, continued disinflation strengthens the case for maintaining the current accommodative policy which could lead to waning loonie support . As a result, if the inflation declines by more than 0.9%, we will favor a bearish forecast 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.
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To discuss this report contact John Rivera, Currency Analyst: [email protected]
