Trading the News: Canada Consumer Price Index (CPI)

Canada’s Consumer Price Index (CPI) may derail the near-term advance in USD/CAD as the headline reading is projected to climb an annualized 1.7% in October, but a further slowdown in the three preferred measures for core inflation may dampen the appeal of the Canadian dollar as the Bank of Canada (BoC) endorses a dovish outlook for monetary policy.

What’s Expected:

Why Is This Event Important:

The BoC looks poised to retain the current policy for the foreseeable future as the central bank pledges to ‘assess the impact of ongoing developments, mindful of the significant uncertainties weighing on the outlook,’ but Governor Stephen Poloz and Co. may keep the door open to further support the real economy as the central bank warns ‘inflation in Canada has been lower than anticipated since October.’ That said, another weaker-than-expected CPI print may fuel the near-term rebound in USD/CAD, and the central bank may continue to cast a cautious outlook for the region as ‘new measures of core inflation are all below 2 per cent presently, weighed down by excess capacity in the economy.’

Expectations: Bullish Argument/Scenario

Increased consumption paired with the pickup in business sentiment may boost consumer prices, and a stronger-than-expected CPI reading may curb the recent rebound in the dollar-loonie exchange rate as it dampens speculation for additional monetary support.

Risk: Bearish Argument/Scenario

However, easing input costs accompanied by the slowdown in private-sector credit may drag on price growth, and another weak inflation print may spark a bearish reaction in the Canadian dollar as it puts increased pressure on the BoC to further support the real economy.

Bullish CAD Trade: Canada CPI Climbs 1.7% or Greater

• Need to see red, five-minute candle following the report 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: Headline & Core Inflation Continues to Disappoint

• 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

(Click on image to enlarge)

• Failure to test the October low (1.3006) may generate a larger recovery in USD/CAD, with the broader outlook tilted to the topside as the pair still operates within the upward trending channel carried over from the previous year; seeing a similar dynamic in the Relative Strength Index (RSI) as the oscillator appears to be responding to trendline support and preserves the bullish formation.
• Interim Resistance: 1.3630 (38.2% retracement) to 1.3660 (78.6% expansion)
• Interim Support: 1.2980 (61.8% retracement) to 1.3020 (50% expansion)

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

November 2016 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

Consumer prices in Canada grew an annualized 1.4% in November following a 1.5% expansion the month prior, with the slowdown largely driven by a 4.3% decline in gasoline prices. At the same time, prices for clothing for clothing and footwear narrowed 2.1% in November, with transportation costs also narrowing 1.2%, while prices for food bounced back 0.5% during the same period. The Canadian dollar struggled to hold its ground following the dismal print, with USD/CAD preserving the losses throughout the North American trade, with the pair ending the day as 1.3480.