FX - USD/CAD: Trading Canada’s 3Q GDP Report

Trading the News: Canada GDP

What’s Expected:

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

Primary Pair Impact: USDCAD

Expected: 3.0%

Previous: -0.4%

DailyFX Forecast: 2.0% to 2.5%

Why Is This Event Important:

Economic activity in Canada is expected to expand at an annual pace of 3.0% in the third-quarter, and the rebound in GDP should spark a bullish reaction in the Canadian dollar as the development instills an improved outlook for the region. As the recovery regains its footing, the Bank of Canada looks poised to maintain its current policy, and the central bank may carry its wait-and-see approach into the following year as Governor Mark Carney sees the economy operating below full-capacity until the end of 2013. However, a strong GDP report may encourage the BoC to soften its dovish tone for monetary policy, and the central bank may see scope to normalize monetary policy in 2012 as growth prospects pick up.

Recent Economic Developments

The Upside

The Downside

The expansion in private sector consumption paired with the rise in foreign trade should help prop up growth, and an above-forecast print could fuel the selloff from 1.0523 as the fundamental outlook for Canada improves. However, the slowdown in business spending paired with the drop in employment is likely to drag on growth rate, and we may see 3Q GDP fall short of market expectations in light of the ongoing weakness within the real economy. In turn, a dismal growth report could spark a sharp rebound in the USD/CAD, and we may see the exchange rate retrace the decline from earlier this week as the region faces an increased risk of a double-dip recession.

Potential Price Targets For The Report

How To Trade This Event Risk

Expectations for a rebound in GDP instills a bullish bias for the loonie, and the market reaction could pave the way for a long Canadian dollar trade as the data fosters a positive outlook for the region. As a result, if the growth rate expands 3.0% or more in the third-quarter, we will need to see a red, five-minute candle following the report 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 objective. The second target 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 order to preserve our profits.

On the other hand, the ongoing slack within the real economy dampens the scope for a larger-than-expected rise in GDP, and a dismal growth report would reduce the appeal of the Canadian dollar as the region faces a slowing recovery. Consequently, a below-forecast print should weigh on the exchange rate, and we will carry out the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Impact that the Canada GDP report has had on CAD during the last quarter

2Q 2011 Canada Gross Domestic Product

Economic activity in Canada unexpectedly weakened in the second-quarter to mark the first contraction since 2009, and the slowing recovery may prompt the central bank to keep the benchmark interest on hold as it aims to stem the downside risks for growth and inflation. A deeper look at the report showed a 2.1% drop in exports, marking the biggest decline in two-years, while private and public sector spending increased 0.4% during the same period. As the slowdown raises the risk of a double-dip recession, we are likely to see the Bank of Canada strike a highly dovish tone for monetary policy, and the central bank may preserve its current policy throughout the second-half of the year in an effort to shore up the ailing economy. Despite the dismal GDP print, the initial reaction was short-lived as the USD/CAD quickly retraced the advance to 0.9786, but the Canadian dollar struggled to hold its ground during the North American trade as the exchange rate settled at 0.9777 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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