Trading the News: Canada Consumer Price Index (CPI)

A sharp rebound in Canada’s Consumer Price Index (CPI) may heighten the appeal of the Canadian dollar, but another downtick in the core rate of inflation may fuel the near-term rebound in USD/CAD as puts increased pressure on the Bank of Canada (BoC) to further support the real economy.

What’s Expected:

Why Is This Event Important:

The BoC may continue to ‘actively’ discuss more stimulus for the real economy amid the ongoing adjustment to the oil price shock, and the central bank may reestablish its easing cycle over the coming months as Governor Stephen Poloz and Co. now anticipate the economy to reach full-capacity ‘materially later than the Bank had anticipated in July.’ In turn, USD/CAD may continue to retrace the decline from earlier this year, but the BoC may preserve its current policy throughout the remainder of 2016 as the central bank argues the risks surrounding the inflation outlook are ‘roughly balanced.’

Expectations: Bullish Argument/Scenario

Improved business confidence accompanied by the sharp pickup in employment may spark a meaningful pickup in price growth, and a positive development may trigger a bullish reaction in the Canadian dollar as market participants scale back bets for additional monetary support.

Risk: Bearish Argument/Scenario

However, easing factory-gate prices paired with the slowdown in private-sector credit may encourage Canadian firms to offer discounted prices, and another dismal inflation report may push USD/CAD back towards the monthly high (1.3278) as it fuels bets for a BoC rate-cut.

Bullish CAD Trade: Canada CPI Rebounds in September

• 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: Headline & Core Inflation Fall Short of Market Forecast

• 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)

Chart - Created Using Trading View

• USD/CAD may work its way back towards the top of the recent range as it snaps back from a fresh monthly low (1.3006), with the pair marking a failed run at the Fibonacci overlap around 1.2980 (61.8% retracement) to 1.2990 (23.6% retracement); will keep a close eye on the Relative Strength Index (RSI) as it retains the downward trend carried over from the summer months, with a break of the bearish formation raising the risk for a broader advance in the exchange rate.
• Interim Resistance: 1.3300 (50% retracement) to 1.3310 (38.2% retracement)
• Interim Support: 1.2764 (August low) to 1.2770 (38.2% expansion)

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

August 2016 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

Canada’s Consumer Price Index (CPI) unexpectedly slowed to an annualized 1.1% from 1.3% in July, with the core rate of inflation largely following suit, with the figure narrowing to 2.0% from 1.8% during the same period. A deeper look at the report showed the slowdown was drive by a 0.9% in gasoline prices, with transportation costs also falling 0.5%, while prices for clothing & footwear picked up 1.1% after contracting 1.6% in July. The Canadian dollar tumbled lower following the weaker-than-expected prints, with USD/CAD climbing above the 1.3100 handle to end the day at 1.3165.