TheNews

- Canada Consumer Price Index (CPI) to Slow After Holding at 2.1% for Last Two-Months.
- Core Inflation to Retain the Fastest Pace of Growth Since April 2012.

Trading the News: Canada Consumer Price Index (CPI)

A slowdown in Canada’s Consumer Price Index (CPI) may generate a further advance in USD/CAD as it gives the Bank of Canada (BoC) greater scope to retain its current policy throughout the remainder of 2014.

What’s Expected:



Why Is This Event Important:

However, the stickiness in core inflation may heighten the appeal of the loonie as it puts increased pressure on central bank Governor Stephen Poloz to adopt a more hawkish tone for monetary policy, and the USD/CAD may face a larger pullback ahead of the October 22 policy meeting should the report boost interest rate expectations.

Expectations: Bearish Argument/Scenario

Release	Expected	Actual
Raw Materials Price Index (MoM) (AUG)	-1.5%	-2.2%
Gross Domestic Product (MoM) (JUL)	0.3%	0.0%
Retail Sales (MoM) (JUL)	0.5%	-0.1%

Easing input costs along with the slowdown in private consumption may generate a marked slowdown in price growth, and a dismal CPI print may generate fresh monthly highs in USD/CAD as market participants scale back bets for higher borrowing costs.

Risk: Bullish Argument/Scenario

Release	Expected	Actual
Business Outlook Future Sales (3Q)	28.00	35.00
New Housing Price Index (YoY) (AUG)	1.5%	1.5%
Average Weekly Earnings (YoY) (JUL)	--	3.3%

However, higher wage growth paired with expectations for a faster recovery may boost price pressures in Canada, and a strong inflation reading should spur a bullish reaction in the Canadian dollar as it raises the BoC’s scope to further normalize monetary policy.

How To Trade This Event Risk
Bearish CAD Trade: Headline & Core Inflation Slows in September

• Need green, five-minute candle following a dismal CPI report to consider long USD/CAD entry
• If the market reaction favors a bearish Canadian dollar trade, establish long with two position
• Set stop at the near-by swing low/reasonable distance from cost; use at least 1:1 risk-to-reward
• Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bullish CAD Trade: Consumer Price Report Tops Market Expectations

• Need red, five-minute candle following the release to look at a short USD/CAD trade
• Carry out the same setup as the bearish loonie trade, just in the opposite direction

Potential Price Targets For The Release
USD/CAD Daily Chart

• Bearish RSI break may undermine inverse head-and-shoulders pattern; will stay constructive as long as USD/CAD holds above the August low (1.0809).
• Interim Resistance: 1.1380 (78.6% expansion) to 1.1400 Pivot
• Interim Support: 1.0830 (61.8% retracement) to 1.0850 (38.2% retracement)

Impact that the Canada CPI report has had on CAD during the last month

Period	Data Released	Survey	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
AUG 2014	09/19/2014 12:30 GMT	2.1%	2.1%	-58	-20

Canada’s Consumer Price Index (CPI) held steady at an annualized rate of 2.1% in August, while the core CPI unexpectedly increased to 2.1% from 1.7% in July, marking the highest reading since May 2012. Though the rise in core inflation may put increased pressure on the Bank of Canada (BoC) to raise the benchmark interest rate, it seems as though the central bank will retain its neutral tone for some time as the fundamental outlook remains clouded by the weakness in global growth. The better-than-expected core inflation print propped up the Canadian dollar, with the USD/CAD dipping below 1.0900 following the release, but the loonie struggled to hold the gains during the North America trade as it closed at 1.0957.

--- Written by David Song, Currency Analyst and Shuyang Ren


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