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Trading News Report

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USD/CAD: Trading the Canadian Retail Sales Report

Thu, Mar 19 2009, 05:49 GMT
by Daily FX Research Team

DailyFX

A Bloomberg News survey shows that economists forecast retail sales in Canada to increase 1.0% in January even as demands dropped at a record pace in the previous month however, as households face a deepening recession paired with a weakening labor market, private-sector spending is likely to remain subdued throughout the first half of the year as the outlook for growth and inflation falter.

Trading the News: Canadian Retail Sales

What’s Expected

Time of release: 03/20/2009 12:30 GMT, 08:30 EST

Primary Pair Impact : USDCAD

Expected: 1.0%

Previous: -5.4%

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

December 2008 Canada Retail Sales

Retail sales in Canada plunged 5.4% in December to mark its biggest decline since January 1991, and conditions are likely to get worse as the world’s eighth largest economy heads into a deepening recession. The breakdown of the report showed that gasoline receipts slipped another 11.7% after falling 15.1% in the previous month, while demands for building supplies fell 5.6% during the month, and was followed by a 3.7% drop in clothing sales. The data continues to reinforce a dour outlook for growth as households face a weakening labor market paired increased turmoil in the banking sector, and as a result, the Bank of Canada is widely expected to lower the benchmark interest rate by 50bp to a record low of 0.50% in an effort to jump-start the economy and may adopt unconventional policy tools to counter the recession as borrowing costs fall close to zero.

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.

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

A Bloomberg News survey shows that economists forecast retail sales in Canada to increase 1.0% in January even as demands dropped at a record pace in the previous month however, as households face a deepening recession paired with a weakening labor market, private-sector spending is likely to remain subdued throughout the first half of the year as the outlook for growth and inflation falter. The Canadian GDP report showed that the economy contracted 3.4% in the fourth quarter to mark its biggest decline since 1991, which was well below the Bank of Canada’s forecast for a drop of 2.3%, and conditions are likely to get worse throughout the first half of the year as the labor market deteriorates at a rapid pace. A report by Statistics Canada showed that the economy lost another 82.6K jobs in February after shedding 129.0K jobs in the previous, which was the biggest decline since comparable records began in 1976, and raised the annual rate of unemployment to a six-year high of 7.7% from 7.2% in December, which foreshadows a weakening outlook for private-spending as households face fading demands for employment. Moreover, a separate report showed that wholesales sales in the region fell the most since 2003 as demands drop 3.4% in December, and as the economic docket continues to reinforce fears of a deepening downturn in the region, policy makers may continue to lower borrowing costs and adopt additional policy tools to stimulate the ailing economy as the interest rate falls close to zero. As a result, BoC Governor Mark Carney dropped his opposition to use exceptional measures beyond the interest rate to shore up the economy, and said that the central bank stands ready to ‘provide additional monetary stimulus, if required’ through the use of credit and quantitative easing as policy makers employ all of their available tools to mitigate the downside risks for growth. Moreover, the board stated that they will hold the key rate ‘at this level or lower’ in an effort to jump-start the economy however, as the trade conditions deteriorate, weakening fundamentals are likely to weigh on the exchange rate going forward. Nevertheless, as risk trends continue to dictate price action in the currency market, the Canadian dollar is likely to hold its bearish trend against the U.S. dollar as the reserve currency continues to benefit from safe-haven flows.

Expectations for a rebound in retail sales certainly favors a bullish outlook for the Canadian dollar, and an in-line print or a rise of more than 1.0% in household spending would set the stage for a short dollar-loonie trade. Therefore, with our expectations at hand, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of USDCAD, and once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be base 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, as households face a weakening labor market paired with tightening credit conditions, private-demands are likely to weaken further as the economy faces a deepening recession, and a dismal sales report would certainly favor a bearish trade for the commodity currency. As a result, a drop of 0.2% or more in retail spending would lead us to short the loonie, and we will follow the same strategy for a long USDCAD position as the short trade mentioned above, just in reverse.

Published on  Thu, Mar 19 2009, 06:01 GMT