USD/CAD: Trading the Canadian Retail Sales Report

Household spending in Canada is projected to increase another 0.9% in March, and the ongoing expansion in private consumption should spark a bullish reaction in the local currency as the recovery gathers pace.

Trading the News: Canada Retail Sales

What's Expected:

Time of release: 05/20/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.9%

Previous: 0.4%

DailyFX Forecast: 0.0% to 0.6%

Why Is This Event Important:

Household spending in Canada is projected to increase another 0.9% in March, and the ongoing expansion in private consumption should spark a bullish reaction in the local currency as the recovery gathers pace. As the economic docket for Friday is expected to reinforce an improved outlook for growth and inflation, the short-term reversal in the USD/CAD should gather pace, and the Bank of Canada may see scope to lift the benchmark interest rate from 1.00% as it maintains its dual mandate to ensure price stability while fostering full-employment. However, BoC Governor Mark Carney may continue to talk down speculation for higher borrowing costs should the retail sales report disappoint, and the central bank may retain its wait-and-see approach throughout the third-quarter as the fundamental outlook remains clouded with high uncertainty.

Recent Economic Developments

The Upside

Release	Expected	Actual
Leading Indicators (APR)	0.6%	0.8%
Net Change in Employment (APR)	20.0K	58.3K
Unemployment Rate (APR)	7.7%	7.6%

The Downside

Release	Expected	Actual
Wholesale Sales (MoM) (MAR)	1.2%	0.1%
Gross Domestic Product (MoM) (FEB)	0.0%	-0.2%
Business Outlook Future Sales (1Q)	26.50	13.00

As private sector activity gathers pace, the expansion in employment may encourage households to increase their rate of consumption, and retail spending may increase throughout the remainder of the year as the BoC raises its outlook for future growth. However, as Canadians face higher energy costs, households may curb their temperament to spend, and a slowdown in retail sales could lead the central bank to support the real economy for most of 2011 as policy makers aim to encourage a sustainable recovery. In turn, BoC Governor Mark Carney may retain his pledge to ‘carefully consider' future rate hikes at the next interest rate decision scheduled for the end of May, and the Canadian dollar may face additional headwinds over the near-term as interest rate expectations falter.

Potential Price Targets For The Release

How To Trade This Event Risk

A second consecutive rise in retail sales certainly reinforces a bullish outlook for the loonie, and the market reaction to the report could set the stage for a long Canadian dollar trade as growth prospects improve. Therefore, if spending increases 0.9% or greater in March, we will need to see a red, five-minute candle following the data to establish 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 generate our first objective. The second target 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 lock-in our profits.

In contrast, households may dampen their willingness to spend as the central bank maintains a cautious outlook for the region, and a dismal sales report could lead the BoC to retain its current policy over the coming months as the central bank aims to balance the risks for the region. As a result, if private consumption increases less than 0.4% or unexpectedly contracts from the previous month, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

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)
Feb 2011	4/21/2011 12:30 GMT	0.5%	0.4%	+20	+54

February 2011 Canada Retail Sales

Retail spending in Canada increased 0.4% in February to mark the first rise in three-months, while sales excluding autos advanced 0.7% during the same period amid forecasts for a 0.5% expansion. The breakdown of the report showed a 1.3% rise in gasoline receipts, with discretionary spending on clothing and accessories rising 2.5%, while demands for motor vehicle and parts weakened 0.6% from the previous month. Although the rebound in private sector consumption encourages an improved outlook for the region, the Bank of Canada is likely to retain a cautious tone for the real economy given the substantial margin of slack within the private sector, and Governor Mark Carney is likely to maintain his pledge to carefully consider future rate hikes throughout the first-half of the year in order to encourage a sustainable recovery. The smaller-than-expected rise in retail sales certainly weighed on the exchange rate, with the USD/CAD paring the overnight decline, and the Canadian dollar continued to lose ground during the North American trade as the pair ended the day at 0.9529.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com