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USD/CAD: Trading the Canadian Retail Sales Report

Fri, Feb 20 2009, 11:53 GMT
by Daily FX Research Team

DailyFX

The Canadian dollar is likely to face increased selling pressures over the follow week as economists forecast retail spending to contract another 2.4% in December. As the world’s eighth largest economy faces its first economic slump since 1992, the outlook for growth remains bleak, and economic activity throughout the region is expected to weaken further as the labor market deteriorates at a record pace.

Trading the News: Canada Retail Sales

What’s Expected

Time of release: 02/23/2009 13:30 GMT, 08:30 EST

Primary Pair Impact : USDCAD

Expected: -2.4%

Previous: -2.4%

Effect the Canada Retail Sales on USDCAD for the past 2 months

November 2008 Canada Retail Sales

Private spending in Canada fell at its fastest pace in over a decade as sales plunged 2.4% in November, and the outlook for economy remains bleak as Finance Minister Jim Flaherty expect the annual rate of growth to contract 0.4% in 2009. A deeper look into the report showed that the decline was driven by a 7.1% drop in auto sales, which was followed by a 14.9% contraction in gasoline receipts, while discretionary spending of clothing slipped another 0.2% after falling 2.0% in the previous month. The data suggests that the world’s eighth largest economy is headed into a deepening recession as economic activity deteriorates at a record pace, and the outlook for growth remains bleak as global trade conditions falter. As a result, the Bank of Canada is expected to continue its easing cycle over the coming months, and may adopt unconventional measures to stimulate the economy as the benchmark interest heads closer to zero.

October 2008 Canada Retail Sales

Retail sales in Canada plunged 1.1% in October after rising 0.9% in the previous month, and conditions are likely to get worse as the world’s eighth largest economy slips into a recession. The breakdown of the report showed that demands for electronics fell 2.1% from the previous month, while discretionary spending on clothing dropped 1.5% during the month. The data reflects a dour outlook for growth as the Bank of Canada expects the economy to face its first recession in over a decade, and may lead policy makers to step up their efforts in the months ahead in order to avoid a deep and severe downturn in the economy. Meanwhile, BoC Governor Mark Carney warned that domestic demands are likely to weaken further as the unemployment rate pushes higher, and said that conditions will be ‘difficult’ in 2009 as growth prospects deteriorate at a rapid pace.

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:

Bullish Scenario:

If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.

Bearish Scenario:

If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.

How To Trade This Event Risk

The Canadian dollar is likely to face increased selling pressures over the follow week as economists forecast retail spending to contract another 2.4% in December. As the world’s eighth largest economy faces its first economic slump since 1992, the outlook for growth remains bleak, and economic activity throughout the region is expected to weaken further as the labor market deteriorates at a record pace. A report by Statistics Canada showed that the economy lost 129.0K jobs in January, which was the biggest decline since comparable records began in 1976, and raised the annual rate of unemployment to a four-year high of 7.2% from 6.6% in December. Meanwhile, the monthly GDP report for Canada showed that economic activity contracted another 0.7% in November after falling 0.1% in the previous month, and conditions are likely to get worse as the Bank of Canada forecasts the annual rate of growth to drop 1.2% this year. Moreover, earlier this week we saw that wholesales sales in the region fell the most since 2003 as demands drop 3.4% in December, and the data reinforces a dour outlook for private spending as households continue to face financial uncertainties paired with tightening credit conditions. In an effort to stimulate the ailing economy, the Bank of Canada is widely expected to lower the benchmark interest rate by another 25bp to 0.75%, which would be the lowest level since the central bank was established in 1934, and as price growth is projected to fall below the BoC’s 2% target for inflation this year, policy makers are likely to adopt a zero interest rate policy over the near-term, and may implement unconventional measures to manage monetary policy going forward. Nevertheless, as oil prices continue to fall lower while investors remain risk adverse, safe-haven flows are could weigh on the Canadian exchange rate over the following week as the flight to quality continues.

Trading the given event risk clearly favors a bearish outlook for the Canadian dollar as market participants anticipate growth prospects to deteriorate further however, if the release crosses the wires better than expected (sales falls less than 2.0%), an enhanced sales report would set the stage for a long loonie trade. Therefore, with our expectations at hand, we will look for a red, five-minute candle following the event to confirm a sell entry on two lots of USDCAD. Once these conditions are met, we will set our initial stop at the nearby since high (or reasonable distance) and this risk will determine our first target. Our second target will be based purely on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, the record drop in employment paired with expectations of a deepening recession is likely to weigh on household spending, and a dismal consumption report would certainly favor a bearish trade for the commodity currency. As a result, an inline print or a decline of more than 2.4% in retail sales will lead us to hold a bullish outlook for the pair, and we will follow the same strategy for the long position as the short trade mentioned above, just in reverse.

Published on  Fri, Feb 20 2009, 12:03 GMT