Sticky Canada CPI to Foster Larger USD/CAD Pullback

- Canada Consumer Price Index (CPI) to Uptick for Second Straight Month.

- Core Rate of Inflation to Hold Steady at Annualized 1.8% for Third Consecutive Month.

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Trading the News: Canada Consumer Price Index (CPI)

Another uptick in Canada’s Consumer Price Index (CPI) along with stickiness in the core rate of inflation may foster a larger pullback in USD/CAD as the Bank of Canada (BoC) ‘expects total CPI inflation to be close to 2 percent from early 2017 onwards.’

What’s Expected:

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Why Is This Event Important:

Even though the BoC ‘actively’ discussed more stimulus for the real economy, it seems as though Governor Stephen Poloz and Co. will continue to endorse a wait-and-see approach for monetary policy as ‘Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016.’ The risk of overshooting the 2% target for inflation may push the BoC to gradually move away from its easing-cycle, but signs of subdued price growth may encourage the central bank to further support the real economy as the region is anticipated to return to ‘full capacity around mid-2018, materially later than the Bank had anticipated in July.’

Expectations: Bullish Argument/Scenario

The pickup in business confidence paired with the ongoing improvement in the labor market may fuel faster price growth in Canada, and a positive development may boost the appeal of the Canadian dollar as market participants scale back bets for another round of monetary stimulus.

Risk: Bearish Argument/Scenario

Release	Expected	Actual
Ivey Purchasing Manager Index s.a. (OCT)	56.0	59.7
Net Change in Employment (OCT)	-15.0K	43.9K
Business Outlook Future Sales (3Q)	--	12.00

Nevertheless, easing input-costs accompanied by the slowdown in private-sector consumption may push Canadian firms to offer discounted prices, and a softer-than-expected inflation report may spark a bearish reaction in the loonie as it puts increased pressure on the BoC to further embark on its easing-cycle.

How To Trade This Event Risk(Video)

Bullish CAD Trade: Canada CPI Picks Up for Second Consecutive Month

• Need to see red, five-minute candle following the release to consider a short trade on USD/CAD.


• If market reaction favors a long loonie trade, sell USD/CAD with two separate position.


• Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.


• Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bearish CAD Trade: Inflation Report Falls Short of Market Expectations

• Need green, five-minute candle to favor a long USD/CAD trade.


• Implement same setup as the bullish Canadian dollar trade, just in the opposite direction.

Potential Price Targets For The Release

USD/CAD Daily

Chart - Created Using Trading View

• Broader outlook for USD/CAD remains constructive as the pair preserves the upward trending channel carried over from earlier this year, with the Relative Strength Index (RSI) highlighting a similar dynamic, but the recent series of lower highs & lows may pave a larger pullback in the exchange rate especially as the oscillator struggles to push into overbought territory.


• Interim Resistance: 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion)


• Interim Support: 1.2980 (61.8% retracement) to 1.3030 (50% retracement)

Check out the short-term technical levels that matter for USD/CAD heading into the report!

Impact that Canada’s CPI report has had on USD/CAD during the last release

Release	Expected	Actual
International Merchandise Trade (SEP)	-1.70B	-4.08B
Raw Materials Price Index (MoM) (SEP)	0.5%	-0.1%
Retail Sales (MoM) (AUG)	0.3%	-0.1%

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
SEP 2016	10/21/2016 12:30 GMT	1.4%	1.3%	+102	+99

September 2016 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

Canada’s Consumer Price Index (CPI) climbed an annualized 1.3% in September following a 1.1% expansion the month prior, while the core rate of inflation held steady at an annualized 1.8% for the second consecutive month. The weakness was largely driven by a 1.3% decline in the cost for food, while prices for clothing & footwear increased another 3.4% following the 1.1% expansion in August, with gasoline prices rebounding 0.8% during the same period. The Canadian dollar sold off following the softer-than-expected inflation report, with USD/CAD climbing above the 1.3300 handle to end the day at 1.3333.

Get our top trading opportunities of 2016 HERE

Read More:

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--- Written by David Song, Currency Analyst

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

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Sticky Canada CPI to Foster Larger USD/CAD Pullback
Sticky Canada CPI to Foster Larger USD/CAD Pullback
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