USD/CAD: Trading the Canadian Consumer Price Index
Prices pressures in Canada are expected to weaken further as economists forecast the consumer price index to slip to an annual reading of 3.1% from 3.4% in September. Falling oil prices paired with the slowdown in the economy has certainly helped to curb the upside risks for inflation, and may weaken further over the coming months as commodity prices continues to tumble lower.
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Trading the News: Canadian Consumer Price Index (YoY)
What’s Expected
Time of release: 11/21/2008 12:00 GMT, 07:00 EST
Primary Pair Impact : USDCAD
Expected: 3.1%
Previous: 3.4%
Impact the Canadian CPI numbers had on USDCAD over the last 3 months
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September 2008 Canadian Consumer Price Index
The headline reading for inflation fell 0.1% to 3.4% from 3.5% in September, which crossed the wires slightly stronger than the 3.3% median estimate projected by economists. Meanwhile, the core measure for inflation held steady at 1.7% as higher food and energy costs continues to pass through the real economy. As price pressures begin to alleviate, the Bank of Canada expects inflation to have peaked as oil prices continue to slide lower, and have pushed inflationary concerns to the backburner as they turn their attention to the downside risks for growth. As a result, the BoC lowered the benchmark interest rate by 75bp in October to respond to the downturn in the global financial market, and may lead policymakers to ease policy further over the coming months as fears of worldwide recession intensify.
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August 2008 Canadian Consumer Price Index
The Canadian consumer price index rose to 3.5% from 3.4% in July to reach its highest level since 2003. Higher food and oil costs continues to stoke inflationary concerns for the Bank of Canada as inflation remains above the bank’s upper limit of 3%, and may lead the central bank to hold a neutral policy stance as they expect economic activity to remain subdued for the rest of the year. However, the recent pull back in oil prices may help to ease price pressures over the coming months, which could lead the BoC to push inflationary concerns to the backburner to focus on the downside risks to growth. The downturn in the U.S. has certainly taken a toll on the Canadian economy, and conditions may get worse as growth prospects for the world’s largest economy deteriorates.
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July 2008 Canadian Consumer Price Index
Annual inflation in Canada fell in line with expectations, rising to a five year high of 3.4% in July on the back on record high oil prices. A breakdown of the report showed that gasoline prices rose 29%, while natural gas prices were up 25% from last year. However, after peaking to $147 a barrel in July, oil prices have pulled back from its record high, which suggests that inflation will moderate over the coming months. Meanwhile, the Bank of Canada lowered their growth outlook, stating that the economy will grow at 1% for the rest of the year. Falling energy prices paired with stagnant could lead the Bank of Canada to lower the benchmark interest ahead of schedule as economic activity continues to falter.
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How To Trade This Event Risk
Prices pressures in Canada are expected to weaken further as economists forecast the consumer price index to slip to an annual reading of 3.1% from 3.4% in September. Falling oil prices paired with the slowdown in the economy has certainly helped to curb the upside risks for inflation, and may weaken further over the coming months as commodity prices continues to tumble lower. In September, the raw materials price index fell another 7.2% after slipping 7.7% in the previous month, and was followed by a 1.2% decline in the industrial product price index. Alleviating price pressures for the world’s eighth largest economy led the Bank of Canada to lower the benchmark interest rate for two consecutive policy meetings in October, and may allow the central bank to ease policy even further over the coming months as growth prospects deteriorate. Economic growth in Canada contracted 0.3% in August, and conditions may only get worse in the months ahead as the U.S., Canada’s biggest trading partner, heads into a recession. At the December 23rd policy meeting, the BoC lowered the benchmark interest rate by 25bp to 2.25% despite expectations for a 50bp cut, stating that ‘further monetary stimulus’ will be needed as fears of a global recession intensify. The central bank also lowered their growth forecasts to 0.6% from 2.3% for 2009, which suggests that downturn in the global economy is clearly taking a toll on Canada. Meanwhile, Credit Suisse overnight index swaps are showing that market participants expect policymakers to lower the key interest rate by 150bp over the next 12 months, and may cut borrowing costs at the December 9th policy meeting as growth prospects deteriorate. However, as risk sentiment continues to drive price action in the forex market, increased selling pressures for the Canadian dollar could spark a rally in the USDCAD as investors hold a bearish outlook for the commodity bloc.
Trading the given event risk may not be as clear as some of our other trades, but an unexpected rise in the CPI could spark buying pressures for the loonie. As a result, a rise to 3.5% or higher will set the stage for a long Canadian dollar trade, and we will look for a red, five minute candle following the release to confirm a short position on two lots of USDCAD. Our initial stop will be place at the nearby swing low (or reasonable distance), and the first lot’s target will be equal to this initial risk. Our second target will be purely based on discretion, and we will move the stop on the second lot when the first trade reaches its target in order to preserve our profits.
On the other hand, easing price pressures would certainly fuel expectations for a rate cut by the BoC, and an inline print or an inflation reading below 3.4% would clearly favor a bearish outlook for the Canadian dollar. Therefore, we will follow the same setup for the short trade (long USDCAD) as the long trade mentioned above, just in reverse.
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