FX - USD/CAD: Trading Canada’s Retail Sales Report

Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 11/22/2011 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.5%

Previous: 0.5%

DailyFX Forecast: 0.2% to 0.6%

Why Is This Event Important:

Household spending in Canada is expected to increase another 0.5% in September, and the ongoing expansion in private sector consumption could spark a bullish reaction in the loonie as the development highlights an improved outlook for the region. As economic activity gradually gathers pace, we should see the Bank of Canada carry its current policy into 2012, and the central bank may endorse a wait-and-see approach throughout the following year as Governor Mark Carney sees a ‘modest’ recovery going forward. However, as the BoC sees the economy operating below full-capacity until the end of 2013, Mr. Carney may show an increased willingness to scale back the benchmark interest rate from 1.00%, and the central bank may take additional steps to shield the economy as the outlook for global growth turns increasingly bleak.

The ongoing expansion in private sector activity certain bodes well for retail sales, and an above-forecast print should lead the USD/CAD to pare the sharp advance from earlier this month as the development instills an improved outlook for Canada. However, the stickiness in price growth paired with the recent weakness in the labor market may push households to scale back on spending, and we may see private sector consumption wane over the coming months as the region copes with a slowing recovery. As the USD/CAD fails to hold resistance around 1.03000, the pair may threaten the reversal from 1.0656, and the dollar-loonie may trend higher over the coming months as it breaks out of the downward trend carried over from back in 2009.

Recent Economic Developments

The Upside

The Downside

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for another positive retail sales report instills a bullish outlook for the loonie, and the market reaction could set the stage for a long Canadian dollar trade as the economic recovery gathers pace. Therefore, if spending increases 0.5% or greater in September, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to protect our winnings.

On the other hand, the downturn in employment paired with the stickiness in inflation may weigh on household consumption, and a dismal sales report could lead the USD/CAD to threaten the reversal 1.0656 as the fundamental outlook for Canada turns increasingly bleak. As a result, if spending increases less than 0.2% or unexpectedly declines from the previous month, we will implement the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Impact that the Canada Retail Sales report has had on CAD during the last month

August 2011 Canada Retail Sales

Retail spending increased 0.5% in August after contracting a revised 0.5% in the month prior, and the rebound in household consumption may lead the Bank of Canada to maintain a wait-and-see approach throughout the remainder of the year as the economic recovery gradually gathers pace. A deeper look at the report showed demands for motor vehicle and parts increasing 1.0% during the month, with spending on food and beverages advancing 0.3%, while discretionary spending on clothing slipped 0.7% after holding flat in July. As the data highlights an improved outlook for future growth, the BoC should keep the benchmark interest rate at 1.00%, but the central bank may show an increased willingness to expand monetary policy further as the economy faces a slowing recovery. The Canadian dollar lost ground despite the above-forecast print, and the loonie struggled to hold its ground throughout the North American trade as the USD/CAD settled at 1.0165 at the end of the day.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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