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Will Weakening Canadian Fundamentals and Demand Spark A USDCAD Rally?

Fri, Jul 18 2008, 06:11 GMT
by Daily FX Research Team

DailyFX

Trading the News: Canadian Leading Indicators

What’s Expected

Time of release: 06/18/2008 12:30 GMT, 08:30 EST

Primary Pair Impact : USDCAD

Expected: 0.1%

Previous: 0.2%

How To Trade This Event Risk

The Canadian leading economic indicator is expected to have slumped to 0.1% after May’s 0.2% gain. There are several components that could potentially be weaker including the U.S. composite, S&P/TSX stock index and business service employment. Indeed, the Canadian economy lost jobs in June for the first time this year, with the finance sector dropping 9,000 employees. Equities in Canada saw their meteoric rise on the back of the commodity boom end after reaching an all time high of 15,092 on June 18. However, the index would subsequently drop 600 points as the outlook for demand of natural resources has diminished with the global economy slowing. Yet, the 2.7% gain in manufacturing shipments in May on the strength of a 2.7% increase in new orders, demonstrates the recent resiliency the economy has maintained. Expectations were that the U.S. slowdown would have already slowed the Canadian economy, but rising oil and raw material prices have spurred hiring and fueled domestic growth. However, with emerging markets like China showing signs of slowing their recent robust demand for natural resources will decline, pulling down commodity prices with it. The Canadian wholesales sales report will cross the wires simultaneously and is expected to provide additional bearish loonie sentiment, as demand is predicted to have slowed to 0.5% from 1.4% in May, that combined with the recent decline in oil prices could sink the Canadian dollar.

Despite the recent $10 drop in oil prices the USDCAD has remained near parity with little price volatility. A consecutive month of improvement in the leading indicators will demonstrate the economy’s resiliency and generate bullish loonie sentiment. Therefore, we would look for an improvement of 0.2% or better in the forward looking gauge to trigger a loonie bullish trade. (Short USD/CAD) With the right fundamental mix, we will look for a five minute, red candle to confirm a short on two lots with an initial stop at nearby swing low (or reasonable distance). Our first target will match the risk, the second will be discretionary and to conserve profit we will move the stop to breakeven when the first lot hits its objective.

The expectation that the oil supply will increase may weigh on prices and influence the Canadian dollar, a tepid leading economic indicator print may be enough to send loonie bulls scrambling. We will follow the same setup as described above for a long, just in reverse.

Published on  Fri, Jul 18 2008, 06:24 GMT