USD/CAD: Trading the Canadian Retail Sales Report

Retail spending in Canada is projected to increase another 0.5% in June after climbing 0.1% in the previous month, and the ongoing expansion in household consumption could spur a bullish reaction in the Canadian dollar as growth prospects improve.

Trading the News: Canada Retail Sales

What's Expected:

Time of release: 08/23/2011 12:30 GMT, 8:30 EST

Primary Pair Impact: USDCAD

Expected: 0.5%

Previous: 0.1%

DailyFX Forecast: 0.2% to 0.5%

Why Is This Event Important:

Retail spending in Canada is projected to increase another 0.5% in June after climbing 0.1% in the previous month, and the ongoing expansion in household consumption could spur a bullish reaction in the Canadian dollar as growth prospects improve. As private sector activity gathers pace, the Bank of Canada may show an increased willingness to withdraw monetary stimulus, and we may see Governor Mark Carney drop his pledge to ‘carefully consider' future rate hikes as the central bank sees an increased risk for inflation. However, the downward revision in the growth forecast may prompt the BoC to keep the benchmark interest rate at 1.00% throughout the remainder of the year, and the central bank may see scope to carry its current policy into the following year as it aims to encourage a sustainable recovery.

Recent Economic Developments

The Upside

Release	Expected	Actual
Wholesale Sales (MoM) (JUN)	-0.5%	0.2%
Leading Indicator (MoM) (JUL)	0.2%	0.2%
Business Outlook Future Sales (2Q)	18.00	20.00

The Downside

Release	Expected	Actual
Net Change in Employment (JUL)	15.0K	7.1K
Ivey Purchasing Manager Index s.a. (JUL)	61.0	46.8
Gross Domestic Product (MoM) (MAY)	0.1%	-0.3%

As the recent developments coming out of Canada reinforce an improved outlook for consumption, we could see retail sales expand at a faster pace in June, and the data could lead the USD/CAD to retrace the advance from earlier this week as growth in the region outpaces the recovery in the world's largest economy. However, the slower pace of job growth paired with the economic contraction in May could bear down on household spending, and a dismal sales report may encourage the BoC to keep the interest rate on hold in an effort to balance the risks for the economy. In turn, the dollar-loonie may work its way back towards parity, and the pair may ultimately threaten the upper bounds of the downward trending channel carried over from back in 2009.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a second consecutive rise in retail sales reinforces a bullish outlook for the loonie, and the market reaction to the report could pave the way for a long Canadian dollar trade as growth prospects improve. Therefore, if spending increases 0.5% or greater in June, we will need to see a red, five-minute candle following the release to generate a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will place the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish 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 protect our profits.

On the other hand, we may see the data fall short of market expectations given the ongoing weakness within the real economy, and a dismal sales report could weigh on the exchange rate as the region faces a slowing recovery. As a result, if consumption grows less than 0.2% or unexpectedly contracts from the previous month, we will carry out the same setup 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)
MAY 2011	7/22/2011 12:30 GMT	-0.3%	0.1%	+1	-7

May 2011 Canada Retail Sales

Household spending in Canada unexpectedly increased another 0.1% in May after expanding 0.3% in the previous month, while sales less autos climbed 0.5% versus projections for a 0.3% rise. The breakdown of the report showed a 3.3% advance in demands for building material, with discretionary spending on clothing and accessories increasing 1.0%, while sales of food and beverages slipped 0.9% from the previous month. Although the data highlights an improved outlook for the region, the Bank of Canada may preserve its current policy throughout the remainder of the year as policy makers see a slowing recovery. In turn, we are likely to see central bank Governor Mark Carney maintain his pledge to ‘carefully consider' future rate hikes, and the BoC carry its wait-and-see approach into the following year as it aims to balance the risks for the region. The initial reaction to the sales report was short-lived as the USD/CAD rallied back above 0.9500, but the Canadian dollar recouped the losses during the North American trade as the exchange rate settled at 0.9484 at the end of the day.

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