FX - USD/CAD: Trading the Canada Consumer Price Report

Trading the News: Canada Consumer Price Index

What’s Expected:

Time of release: 03/18/201111:00 GMT, 7:00 EST

Primary Pair Impact: USDCAD

Expected: 2.3%

Previous: 2.3%

DailyFX Forecast: 2.0% to 2.3%

Why Is This Event Important:

Consumer prices in Canada are projected to increase at an annualized 2.3% for the second month in February, and easing price pressures could spur a selloff in the Canadian dollar as the central bank talks down the risk for inflation. After holding the benchmark interest rate at 1.00% earlier this month, the Bank of Canada reiterated future rate hikes will be carefully considered as the economic outlook remains clouded with high uncertainly, and the central bank may see scope to support the real economy throughout the first-half of the year as the risk for inflation wanes. However, rising commodity prices could spark an unexpected rise in the CPI, and a fastest pace of price growth could fuel speculation for higher borrowing costs as the central bank maintains its dual mandate to ensure price stability while promoting full employment.

Recent Economic Developments

The Upside

The Downside

As the economic recovery in Canada gathers pace, with businesses increasing their rate of production, firms may pass on higher costs onto consumers as they face rising energy prices. However, the slowdown in global trade may encourage businesses to keep a lid on prices as household scale back on spending, and a soft inflation report may dampen expectations for a rate hike in the first-half of 2011 as the BoC expect the substantial margin of slack within the real economy to keep inflation close to the 2 percent target. In turn, subdued price growth is likely to weigh on the Canadian dollar, and the near-term rebound in the USD/CAD may gather pace going into the end of the week as interest rate expectations deteriorate.

Potential Price Targets For The Release

How To Trade This Event Risk

Currency traders may show a bearish reaction to the Canadian consumer price report as market participants expect the headline reading for inflation to hold steady from the previous month, but a higher-than-expected reading could set the stage for a long Canadian dollar trade as investors speculate the central bank to normalize monetary policy further this year. Therefore, if the CPI advances to 2.4% or higher in February, we will need to see a red, five-minute candle subsequent to the release to generate a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, 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 when the first trade reaches its mark in an effort to lock-in our profits.

On the other hand, business may continue to conduct heavy discounting in order to draw domestic demands, and a soft consumer price report could bear down on the exchange rate as the BoC maintains a dovish outlook for inflation. As a result, if price growth weakens from the previous month, we will implement the strategy for a long dollar-loonie trade as the short position listed about, just in the opposite direction.

Impact that the Canada Consumer Price report has had on CAD during the last month

January 2011 Canada Consumer Price Index

Price growth in Canada unexpectedly weakened to an annualized rate of 2.3% in January from 2.4% in the previous month, while the core rate of inflation grew 1.4% during the same period amid forecasts for a 1.5% print. A deeper look at the report showed energy prices cooling to 9.0% from 10.5% in the previous month, with prices for clothing and shoes slipping 2.4%, while the cost for transportation increased 4.8% from the previous year. As price pressures cool, the Bank of Canada may see scope to support the real economy throughout the first-half of the year, and the central bank may retain a wait-and-see approach over the coming months as the fundamental outlook remains clouded with high uncertainty. Indeed, the Canadian dollar lost ground following the softer-than-expected inflation report, with the USD/CAD touching a high of 0.9847 subsequent to the release, and the loonie continued to lose ground throughout the North American trade as the exchange rate closed at 0.9858.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com