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Consumer prices in Canada are expected to weakening further throughout the second-half of the year, with economists forecasting the annual rate of inflation to fall 0.3% in June from the previous year, and the slump in price growth could lead the central bank to adopt policy tools beyond the interest rate in an effort to soften the landing of the world's eighth largest economy.

Trading the News: Canada Consumer Price Index

What's Expected
Time of release: 07/17/2009 11:00 GMT, 07:00 EST
Primary Pair Impact : USDCAD
Expected: -0.3%
Previous: 0.1%

Effect the Canadian Retail Sales had on USDCAD for the past 2 months

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

May 2008

06/18/2009 11:00 GMT

-0.2%

0.1%

-5

+62

April 2008

05/20/2009 11:00 GMT

0.6%

0.4%

-39

-112

May 2009 Canada Consumer Price Index

Consumer prices in Canada unexpectedly rose in May, with the annualize rate rising 0.1% from the previous year however, the outlook for inflation remains bleak weak as the nation faces a deepening downturn. At the same time, the core rate of inflation increased to 2.0% from 1.8% in April, driven by a 2.7% rise in transportation costs, and the sudden rise in the cost of living could hamper the outlook for future growth as households face a weakening labor market paired with tightening credit conditions. Meanwhile, the Bank of Canada anticipates price pressures to weaken further this year, and expects inflation to hold below the 2% target until 2011 as economic activity falters. As a result, Governor Mark Carney pledged to keep the benchmark interest rate the record low throughout the following year, and policymakers take further steps to jump-start the economy as the outlook for growth and inflation remains bleak.01TTNA7-16-09

April 2009 Canada Consumer Price Index

The annual rate of inflation for Canada plunged to 0.4% from 1.2% in March, which is the lowest since December 1994, and price pressures are likely to remain subdued throughout the second-half of the year as economic activity falters. As a result, the Bank of Canada is widely expected to hold the benchmark interest at the record-low of 0.25% until the second quarter of 2010 as the central bank maintains a 2% target for inflation. However, as the BoC anticipates price growth to fall 0.8% in the third quarter and projects inflation to stay below the target rate until 2011, policymakers may take further steps to shore up the ailing economy as growth prospects remain weak. At the same time, Governor Mark Carney said that he does not expect to embark on asset purchases to stem the downside risks for the economy, and the comments suggests that the central bank will maintain a neutral policy stance going forward as they pledge to hold borrowing costs at the record-low for some time.01TTNB7-16-09

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:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.


How To Trade This Event Risk

Consumer prices in Canada are expected to weakening further throughout the second-half of the year, with economists forecasting the annual rate of inflation to fall 0.3% in June from the previous year, and the slump in price growth could lead the central bank to adopt policy tools beyond the interest rate in an effort to soften the landing of the world's eighth largest economy. However, as researchers at the Bank of Canada see high uncertainties linked to ‘quantitative easing,' the board may continue to hold a neutral policy stance going forward, and long-term expectations for higher interest rates could drive the Canadian dollar higher throughout the second half of the year. Meanwhile, the BoC saw a risk for a prolonged economic downturn at the June policy meeting, stating that the appreciation in the USD/CAD could ‘fully offset' the recent improvements in the real economy, and Governor Mark Carney may continue to hold a dovish outlook for inflation as he expects price growth to hold below the 2% target until 2011. At the same time, the International Monetary Fund raised its growth forecast and projects economic activity to contract at an annual pace of 2.3% versus an initial forecast for a 2.5% drop in GDP, and the improved outlook held by the group may lead the central bank to hold a neutral policy stance going forward as the IMF anticipates the growth rate to rise 1.6% in 2010. Moreover, the BoC senior loan officer survey showed 84% of the businesses polled anticipate inflation to hold within the bank's 1-3% target range for price growth over the next two-years, and the rebound in inflation expectations could lead the board to maintain its current policy in place as the economic outlook improves. Moreover, the survey also said that only a handful of firms noted a drop in input prices following the appreciation in the Canadian dollar, with businesses planning to pass on the savings to consumers. Nevertheless, a Bloomberg News survey shows economists polled anticipate the central bank to hold the benchmark interest rate at the record-low of 0.25% next week, and the central bank may continue to sit on the sidelines as growth prospects improve.

Trading the given event risk favors a bearish outlook for the Canadian dollar but nevertheless, the unexpected rise in the headline reading for inflation during the previous month has left the door open for an upward surprise. Therefore, if the annual rate of price growth unexpectedly holds steady at 0.1% or tips higher in June, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of USD/CAD. Once these conditions are met, we will place the initial stop at the nearby swing high (or reasonable distance), and this risk will establish out first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches target in order to preserve our profits.

On the other, the slump in global trade paired with the drop in factor prices is likely to weigh on inflation, and price action following the release could set the stage for a short Canadian dollar trade. As a result, an in-line print or a drop of more than 0.3% in the annual rate would favor a bearish outlook for the commodity currency, and we will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.