USD/CAD at Risk for Larger Rebound on Slowing Core Canada CPI

- Headline Consumer Price Index (CPI) to Hold Steady at 0.8%- Lowest Since Oct. 2013.

- Core Rate of Inflation to Slow for Second Straight Month to Annualized 2.1%.

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Trading the News: Canada Consumer Price Index (CPI)

Despite forecasts for another 0.8% print for Canada’s headline Consumer Price Index (CPI), a slowdown in the core rate of inflation may drag on the loonie and encourage a more bullish outlook for USD/CAD as it raises the Bank of Canada’s (BoC) scope to keep the benchmark interest rate on hold for an extended period of time.

What’s Expected:

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Why Is This Event Important:

The BoC may carry its current policy into 2016 as it continues to endorse a wait-and-see approach, but positive developments coming out of the region may put increased pressure on the central bank to further normalize monetary policy as Governor Stephen Poloz turns upbeat towards the economy.

Expectations: Bearish Argument/Scenario

Waning confidence paired with the ongoing weakness in household consumption may encourage U.S. firms to offer discounted prices, and a marked downtick in the CPI may generate a bearish reaction in the greenback as it drags on interest rate expectations.

Risk: Bullish Argument/Scenario

Nevertheless, the expansion in service-based activity along with the pickup in private-sector credit may encourage a sticky inflation print, and a positive development may boost the appeal of the reserve currency as the Fed remains on courses to normalize monetary policy in 2015.

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How To Trade This Event Risk(Video)

Bearish CAD Trade: U.S. Headline & Core CPI Show Greater Risk for Disinflation

• Need to see green, five-minute candle following the release to consider a long trade on EUR/USD.
• If market reaction favors a bearish dollar trade, buy EUR/USD with two separate position.
• Set stop at the near-by swing low/reasonable distance from entry; look for 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 Index Exceeds Market Forecast

• Need red, five-minute candle to favor a short EUR/USD trade.
• Implement same setup as the bearish dollar trade, just in reverse.

Potential Price Targets For The Release

USD/CAD Daily

Chart - Created by David Song

• Downside risks remain for USD/CAD amid the bearish patterns in price & the Relative Strength Index (RSI), but a break of channel resistance may generate range-bound prices over the near-term.
• DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short USD/CAD since June 18, with the ratio coming off of extremes to hold at -1.24..
• Interim Resistance: 1.2360 (38.2% retracement) to 1.2380 (50% retracement)
• Interim Support: 1.2110 (61.8% retracement) to 1.2130 (23.6% retracement)

Read More:

Price & Time: USD/JPY Still Bullish?

GBP/USD RSI Flirts with Overbought Territory- Retail FX Remains Short

Impact that Canada CPI has had on USD/CAD during the last release

April 2015 Canada Consumer Price Index

Canada’s Consumer Price Index (CPI) unexpectedly slowed to an annualized 0.8% in April to mark the lowest reading since October 2013, while the core rate of inflation also fell short of market estimate as the reading narrowed to 2.3% from 2.4% the month prior. A deeper look at the report showed the slowdown was largely driven by a decline in energy prices along with discounted prices for clothing and footwear. Despite the temporary factors dragging on the economy, it seems as though the Bank of Canada (BoC) will largely retain a neutral policy stance throughout 2015 following the insurance rate cut in January as Governor Stephen Poloz endorses a wait-and-see approach. The Canadian dollar struggled to hold its ground following the disappointing prints, with USD/CAD surging above the 1.2250 region to close the day at 1.2277.

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

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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