USD/CAD: Trading the Canadian Retail Sales Report

USD/CAD: Trading the Canadian Retail Sales Report

Retail spending in Canada is widely expected to improve for the third consecutive month in July, with economists forecasting household consumption to increase 0.5% from the previous month, and the data is likely to drive the exchange rate higher as the Bank of Canada projects the world’s eighth largest economy to emerge from the recession in the third quarter.

Trading the News: Canadian Retail Sales

What’s Expected
Time of release:        09/22/2009 12:30 GMT, 08:30 EST
Primary Pair Impact :    USDCAD
Expected:         0.5%
Previous:         1.0%

Effect the Canadian Retail Sales had on USDCAD for the past 2 months

 

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Jun 2009	08/24/2009 12:30 GMT	0.2%	1.0%	-37	-15
May 2009	07/22/2009 12:30 GMT	0.5%	1.2%	+8	-40

June 2009 Canada Retail Sales   Canadian retail sales jumped 1.0% in June amid expectations for a 0.2% rise, and the extraordinary efforts taken on by the government should help to stabilize economic activity going forward as the Bank of Canada pledges to hold the benchmark interest at the record-low going into the following year. A deeper look at the report showed automotive sales jumped 2.1% after rising 2.5% in May, with gasoline receipts increasing 4.7% from the previous month, while discretionary spending on food and beverages increased 1.3% during the month. The data reinforces a improved outlook for the world’s eighth largest economy as the Bank of Canada anticipate the nation to emerge from the economic downturn in the third quarter however, as households face a weakening labor paired with tightening credit conditions, fears of a slower recovery may lead consumers to scale back on spending as the outlook for future growth remains weak.

May 2008 Canada Retail Sales   Household spending in Canada surged 1.2% in May, topping expectations for a 0.5% rise, and the data encourages an enhanced outlook for future growth as policymakers anticipate economic activity to improve throughout the second-half of the year. The breakdown of the report showed automotive sales jumped 2.4% from April, with gasoline receipts increasing 0.9%, while discretionary spending on food and beverages rise 0.7% from the previous month. Meanwhile, the Bank of Canada raised its growth forecast for the world’s eighth largest economy in July and projects GDP to contract at an annual pace of 2.3% this year amid an initial forecast for a 3.0% drop in April, and the improve outlook held by the central bank may continue to push the Canadian dollar higher over the near-term as investors anticipate the BoC to tighten policy over the next 12 months.

What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

How To Trade This Event Risk

Retail spending in Canada is widely expected to improve for the third consecutive month in July, with economists forecasting household consumption to increase 0.5% from the previous month, and the data is likely to drive the exchange rate higher as the Bank of Canada projects the world’s eighth largest economy to emerge from the recession in the third quarter. At the same time, the GDP report instilled a weakened outlook for the region as the annual rate of growth contracted more than expected during the second quarter after falling at a record-pace during the first three-months of the year, and the slump in global trade may lead firms to scale back on production and employment throughout the second-half of the year in order to reduce costs . Nevertheless, demands for new motor vehicles jumped 5.3% in July, with manufacturing sales increasing 5.5% during the same period, while wholesale sales jumped 2.8% from June to top expectations for a 0.9% rise. In addition, the leading economic indicator for Canada increased 1.1% in August to mark the biggest rise since 2002, while the fall in consumer prices continued to boost the spending power for households, and the data encourages an improved outlook for private consumption as policy makers take unprecedented steps to stimulate the ailing economy. The Bank of Canada held the benchmark interest rate 0.25% earlier this month and pledged to keep borrowing costs at the record-low in an effort to foster a sustainable recovery, and went onto say that “growth in  the second half of 2009 could be stronger than the bank projected in July.” However, the central bank saw a risk for a slower recovery following the rapid appreciation in the exchange rate, with the board stating that “persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation.” As a result, the BoC continued to reiterate that the board retains “considerable flexibility” in the management of monetary policy as borrowing costs remain at the lowest level since the central bank was establish in 1934, and policy makers may take steps to stem the appreciation in the exchange rate as trade conditions remain far from favorable. As the government stimulus begins to taper off, fears of a slower recovery may lead households to ramp up their rate of savings as the outlook for future growth remains uncertain, and an unexpected drop in household spending is likely to drag on the exchange rate as investors weigh the prospects  for a sustainable recovery.

Expectations for rise in retail sales favors a bullish outlook for the Canadian dollar as growth prospects improve, and price action following the release could set the stage for a short dollar-loonie trade. Therefore, if household consumption increases 0.5% or greater in July, we will look for a red, five-minute candle subsequent to the release to generate a sell entry on two-lots ofUSD/CAD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.

In contrast, fears of a slower recovery paired with the rise in unemployment may lead households to scale back on spending as the economic outlook remains uncertain, and an unexpected drop in retail sales is likely to stoke increased selling pressures on the Canadian dollar as investors weigh the likelihood for a sustainable recovery. As a result, if retail sales falls 0.2% or greater from the previous month, we will favor a bullish outlook for the USD/CAD, and we will follow the same strategy for a long dollar-loonie trade as the short position mentioned above, just in reverse.