FX - USD/CAD: Trading the Canada Retail Sales Report

Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 06/21/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:USDCAD

Expected: 0.4%

Previous: 0.0%

DailyFX Forecast: -0.2% to 0.2 %

Why Is This Event Important:

Retail spending in Canada is projected to increase 0.4% in April after holding flat in the previous month, and the rebound in household consumption could spark a bullish reaction in the loonie as growth prospects improve. However, as the Bank of Canada sees economic activity slowing in the second-quarter, the sales report may continue to miss market expectations, and a dismal spending report could lead the central bank to maintain its wait-and-see approach throughout the second-half of the year in order to encourage a sustainable recovery. In turn, the USD/CAD may make another run at 0.9900, and the exchange rate may continue to retrace the decline from earlier this year as investors scale back speculation for higher borrowing costs.

Recent Economic Developments

The Upside

The Downside

The ongoing recovery in the labor market paired with the better-than-expected consumption reports suggest we will see a rebound in household spending, and a marked improvement in retail sales could encourage the BoC to normalize monetary policy further in 2011 as growth and inflation gather pace. However, the slowing recovery paired with heightening price pressures may lead households to scale back on spending, and central bank Governor Mark Carney may continue to strike a balanced tone for future policy as the economic outlook remains clouded with uncertainties. As a result, interest rate expectations may deteriorate further in the second-half of the year, and the USD/CAD appears to have carved out a bottom in May as there appears to be a major shift in risk-taking behavior.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a rebound in household spending certainly reinforces a bullish outlook for the loonie, and the market reaction to the consumption report could pave the way for a long Canadian dollar trade as private sector activity gathers pace. Therefore, if sales increases 0.4% from the previous month, we will need to see a red, five-minute candle following the data 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 lock-in our profits.

On the other hand, households in Canada may curb their willingness to spend as the central bank maintains a cautious outlook for the region, and a dismal sales report could lead to a test of 0.9900 as the economic outlook for the region deteriorates. As a result, if spending holds flat of unexpectedly contracts from the previous month, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

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

March 2011 Canada Retail Sales

Household spending in Canada unexpectedly held flat in March after expanding a revised 0.5% in the previous month, and the slowdown in private sector consumption may lead the central bank to keep the benchmark interest rate on hold for most of 2011 as it aims to encourage a sustainable recovery. The breakdown of the report showed sales of food and beverage slipped 0.1% during the month, with discretionary spending on clothing weakening 0.9%, while gasoline receipts increased 1.4% on higher energy prices. The slowdown in private sector consumption certainly dampens the outlook for future growth, and the Bank of Canada looks poised to carry its wait-and-see approach in to the second-half of the year as Governor Mark Carney continues to highlight the ongoing weakness within the private sector. Indeed, the dismal sales report sparked a bearish reaction in the Canadian dollar, with the USD/CAD rallying to a high of 0.9770, but the loonie recouped some if the losses during the North American trade as the pair ended the day at 0.9726.

Questions? Comments? Join us in the DailyFX Forum

Join Currency Analyst Michael Boutros in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

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