A slowdown in Canada’s Consumer Price Index (CPI) may undermine the recent strength in the loonie, but a pickup in the core rate of inflation may fuel further losses in USD/CAD as it puts pressure on the Bank of Canada (BoC) to lift the benchmark interest rate off of the record-low.

Why Is This Event Important:

The BoC may gradually change its tune over the coming months as officials note ‘the Canadian economy’s adjustment to lower oil prices is largely complete,’ and Governor Stephen Poloz and Co. may show a greater willingness to start normalizing monetary policy as ‘growth will gradually strengthen and broaden over the projection horizon.’ However, the central bank may merely try to buy more time at the next meeting on July 12 as ‘the Bank’s three measures of core inflation remain below two per cent and wage growth is still subdued,’ and more of the same from the BoC may keep the broader outlook for USD/CAD tilted to the topside especially as the Federal Open Market Committee (FOMC) appears to be on course to unload its balance sheet later this year.

Impact that the Canada CPI report has had on USD/CAD during the previous release

April 2017 Canada Consumer Price Index (CPI)

USD/CAD 5-Minute

Canada’s Consumer Price Index (CPI) unexpectedly held steady at an annualized 1.6% in April, with the core rate of inflation highlighting a similar dynamic as the figure grew another 1.3% per annum during the same period. A deeper look at the report showed the weakness was led by a 2.0% decline in prices for clothing & footwear, which was followed by a 1.1% contraction in the cost for food, while gasoline prices surged an annualized 15.9% in April. The Canadian dollar lost ground immediately following the release, but the market reaction was short-lived, with USD/CAD slipping back below the 1.3550 region to end the day at 1.3509.

Bearish CAD Trade: Headline & Core Inflation Remains Subdued

• Need a green, five-minute candle following the CPI report to favor a long USD/CAD trade.
• If market reaction favors a bearish loonie trade, buy USD/CAD with two separate lots.
• Set stop at the near-by swing low/reasonable distance from entry; look for at least 1:1 risk-to-reward.
• Move stop to breakeven on remaining position once initial target is met, set reasonable limit.

Bullish CAD Trade: Canada CPI Exceeds Market Expectations

• Need a red, five-minute USD/CAD candle to consider a long loonie trade.
• Implement the same setup as the bearish loonie trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily

(Click on image to enlarge)

• Broader outlook for USD/CAD remains constructive as the pair largely preserves the upward trend carried over from 2016, but the pair may continue to consolidate over the near-term especially as the Relative Strength Index (RSI) extends the bearish formation carried over from the previous month.
• In turn, USD/CAD may continue to cling to trendline support, but a break of the June-low (1.3165) may expose the 1.3150 (78.6% retracement) hurdle, with the next downside region of interest coming in around 1.2970 (23.6% expansion) to 1.2990 (23.6% retracement), which largely lines up with the 2017-low (1.3076).
• Interim Resistance: 1.3790 (100% expansion) to 1.3840 (61.8% retracement)
• Interim Support: 1.3280 (50% retracement) to 1.3310 (38.2% retracement)

Retail trader data shows 69.5% of traders are net-long USD/CAD with the ratio of traders long to short at 2.28 to 1. In fact, traders have remained net-long since June 07 when USD/CAD traded near 1.34474; price has moved 1.6% lower since then. The number of traders net-long is 9.3% higher than yesterday and 2.6% higher from last week, while the number of traders net-short is 18.9% lower than yesterday and 18.2% higher from last week.