CAD Risks Further Losses on Disinflation Threat- 1.1200 in View

- Canada Consumer Price Index to Increase for Third Consecutive Month

- Headline Inflation of 1.3% Would Match the Highest Reading Seen in 2013

Trading the News: Canada Consumer Price Index

A pick up in Canada Consumer Prices may spur a more meaningful correction in the USDCAD as it limits the threat of seeing the Bank of Canada (BoC) implement a rate cut in 2014.

What’s Expected:

Time of release: 02/21/2014 13:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 1.3%

Previous: 1.2%

DailyFX Forecast: 1.2% to 1.3%

Why Is This Event Important:

Despite the recent slowdown in economic activity, Governor Stephen Poloz may retain a rather balanced tone for monetary policy should we see a diminishing risk for disinflation, and the BoC may keep the benchmark interest rate on hold this year as central bank officials see a more robust recovery in the U.S. – Canada’s largest trading partner.

Expectations: Bullish Argument/Scenario

Rising input costs along with the uptick in wage growth may spark a further rise in consumer prices, and a higher-than-expected inflation print may spur a more meaningful correction in the USDCAD as it limits the BoC’s scope to implement a rate cut in 2014.

Risk: Bearish Argument/Scenario

However, firms may continue to conduct heavy discounting amid the slowdown in consumption paired with the persistent slack in the real economy, and a dismal CPI print may spur fresh highs in the USDCAD as the BoC shows a greater willingness to revert back to its easing cycle.

How To Trade This Event Risk(Video)

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Bullish CAD Trade: Headline Inflation Advances 1.3% or Greater

• Need red, five-minute candle after the CPI report to consider short USDCAD entry
• If the market reaction favors a long Canadian dollar trade, establish short with two position
• Set stop at the near-by swing high/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

Bearish CAD Trade: Canada Consumer Price Report Disappoints

• Need green, five-minute candle following the release to look at a long USDCAD trade
• Carry out the same setup as the bearish CAD trade, just in the opposite direction

Potential Price Targets For The Release

USDCAD Daily

Chart - Created Using FXCM Marketscope 2.0

• Appears to Have Carved Higher Low Ahead of 1.0900
• Relative Strength Index Breaks Out of Steep Negative Slope
• Interim Resistance: 1.1172 Pivot to 1.1230 (50.0% expansion)
• Interim Support: 1.0900 Pivot to 1.0930 (61.8% expansion)

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

December 2013 Canada Consumer Price Index

As was the case during the November print, CPI data out of Canada for the month of December disappointed by a tenth of a percent. Unlike last month where USD/CAD spiked to fresh multi-year highs, price action was missed and the pair ended the day almost flat. It is no surprise that price action slowed after such a large move post-breakout, especially as market participants scaled back positions before the weekly close and FOMC Rate Decision that following Wednesday. As for this print, price action in USD/CAD to the upside over the past 24 hours combined with important time cycles strongly supports a continuation higher if we see weaker than expected CPI figures. On the other hand, a meet or beat of the inflation data could provide for an opportunistic setup to fade Friday lows.

--- Written by David Song, Currency Analyst and Gregory Marks

To contact David, e-mail [email protected]. Follow me on Twitter at @DavidJSong.

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