USD/CAD: Trading Canada’s Retail Sales Report

By David Song, Currency AnalystMichael Boutros, Currency Strategist

Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 02 / 21 / 2012 13 : 30 GMT, 8:30 EST

Primary Pair Impact : USDCAD

Expected: -0.1%

Previous: 0.3%

DailyFX Forecast: -0.5% to 0.0%

Why Is This Event Important:

Household spending in Canada is expected to contract 0.1% after expanding 0.3% in November, and the slowdown in private sector consumption may drag on the exchange rate as the development dampens the outlook for future growth. As the economic recovery cools, we are likely to see the Bank of Canada endorse a wait-and-see approach throughout the first-half of 2012, and the central bank may see scope to keep the benchmark interest rate at 1.00% for a prolonged period of time as central bank officials maintain a cautious outlook for the region.

Recent Economic Developments

The Upside

Release	Expected	Actual
Leading Indicators (MoM) (JAN)	0.6%	0.7%
Ivey Purchasing Manager Index s.a. (JAN)	59.7	64.1
Building Permits (MoM) (DEC)	1.0%	11.1%

The Downside

Release	Expected	Actual
Consumer Price Index (YoY) (JAN)	2.3%	2.5%
Net Change in Employment (JAN)	22.0K	2.3K
Gross Domestic Product (NOV)	0.2%	-0.1%

The rise in business spending paired with the pickup in building activity may help to prop up retail sales, and an positive print may push the USD/CAD below 0.9900 as the data highlights an improved outlook for Canada. However, the stickiness in price growth paired with the slowdown in employment may weigh on household spending, and a dismal consumption report may encourage the BoC to keep the benchmark interest rate on hold throughout 2012 as the central bank aims to balance the downside risks for the region. As the USD/CAD continues to find support around 0.9900, a larger-than-expected drop in retail sales could pave the way for a correction, and we may see the pair move back towards parity as the data bears down on interest rate expectations.

Potential Price Targets For The Release

A look at the encompassing structure of the USD/CAD sees the pair breaking below the 76.4% Fibonacci extension taken from the October 4th and November 25th crests at 0.9935 at the Sunday open in New York. This level is key and has held as support since the 3rd of February. The loonie pulled back just ahead of the 0.99-figure where daily soft support now stands. Note that daily relative strength index continues to hold below RSI resistance dating back the October 3rd high with a topside break here needed to alleviate some of the pressure on the dollar.

Interim soft support rests at 0.9915 with a break below this level eyeing subsequent support targets at the 123.6% Fibonacci extension taken from the December 14th and January 8th crests at 0.9890, 0.9860, and the 138.2% extension at 9840. Resistance holds at 0.9940 with a break above this key level eyeing targets at the 100% extension at 0.9972, 0.9990, and 1.0010. Should the print prompt a bearish loonie response, look to target topside levels with a daily close above 0.9940 boding well for further dollar advances.

How To Trade This Event Risk

Trading the given event risk certainly casts a bearish outlook for the loonie, but a positive development could set the stage for a long Canadian dollar trade as it reinforces an improved outlook for the real economy. Therefore, if private consumption unexpectedly increases from the previous month, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to protect our profits.

In contrast, the slowdown in hiring paired with the easing recovery may produce a dismal sales report, and the event could pave the way for a near-term correction in the exchange rate as it dampens the prospects for a more robust recovery. As a result, if we see a larger-than-expected drop on household spending, we will implement the same strategy for a long dollar-loonie trade as the short position mentioned above, just in the opposite direction.

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

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
NOV 2011	01/24/2011 13:30 GMT	0.2%	0.3%	+1	-38

November 2011 Canada Retail Sales

Retail spending increased 0.3% in November after expanding a revised 0.9% the month prior, and the development may encourage the Bank of Canada to soften its dovish tone for monetary policy as the economic recovery gradually gathers pace. Indeed, the initial reaction to the above-forecast print was short-lived, with the USD/CAD falling back below 1.0100, and the Canadian dollar continued to gain ground during the North American trade as the exchange rate settled at 1.0087 at the end of the day.

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