What’s Expected

Time of release: 07/23/2008 11:00 GMT, 07:00 ET
Primary Pair Impact : USD/CAD
Expected: 2.9%
Previous: 2.2%

How To Trade This Event Risk

Inflation in Canada is expected to jump to 2.9% from 2.2%, which would put it at the top of the BoC’s 1-3% target band. The central bank had forecasted that inflation would remain at 2% for the year back in January and revised the estimate to 2.4% in April. The latest predictions are that the country could see prices rise as high as 4%, which would double initial estimates. The MPC left their benchmark rate at 3.00% in June despite the economy losing 5,000 jobs as rising fuel costs generated concerns that the economy would soon realize the secondary effects of inflation, such as rising wages. Expectations are increasing that the BoC will raise rates before the U.S., after Governor Carney’s recent optimistic statements that the economy will rebound after a slight downturn in the second half of the year. However, retail sales for May improved 0.4% but was less than the 0.5% forecasted. Also, the less volatile reading of sales ex-autos fell to 0.4% from 1.2% the month prior, signaling that inflation and the weakening labor market are taking a toll on domestic demand. The consumption numbers may push out the chances of hike another month as the MPC takes measure of the downside risks to the economy. The recent 1.6% gain in wholesale sales may show that the softening demand is only temporarily. The commodity boom and corresponding job creation at the beginning of the year may generate enough demand to allow the MPC to focus on inflation.

Despite the disappointing retail sales report and job loss, the Canadian economy has shown signs that it can weather the current U.S. downturn. Manufacturing shipments rose 2.7% in May and investment from foreigners grew to 10.7 billion, both tripled expectations. Rising energy and fuel costs are a global problem and Canada is just beginning to realize their impact. Therefore we would look for inline or higher inflation reading for a loonie bullish trade . If we have this bullish fundamental mix, we will look for a red, five-minute candle to confirm entry on two lots of USDCAD at market. Our stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise) and the first lot’s target will be immediately set equal to this initial risk. The second target will be determined by discretion. To preserve profit, we will move the stop on the second lot to breakeven when the first takes profit.

Alternatively, easing prices on the heels of lower retail sales and job losses will allow the central bank time to weigh the upside versus the downside risks which will foster bearish loonie sentiment. For a long we will look for prices to remain unchanged or rise less than expected, especially if core prices fail to appreciate, and follow the same setup as the short, just in reverse.

Jamie Saettele is a Technical Currency Analyst for FXCM.