How To Trade Canadian Retail Sales After The BoC's Comments And Weak CPI Data

Looking back over the market’s reaction to the last three retail sales reports from Canada, it is clear that there needs to be more at work than a mere surprise between the actual number and the official forecast to trade this event risk successful. One consideration that has proven its influence on the reaction to the retail sales gauge in the past is the wholesale report. For September, the wholesale report could have a modest impact on its retail counterpart as the former rose 1.1 percent versus expectations of no change and a 1.9 percent drop in the previous month.

Trading the News: Canadian Retail Sales

What’s Expected

Time of release:         11/21/2007 13:30 GMT, 08:30 EST

Primary Pair Impact : USDCAD

Expected:                     0.0%

Previous:                      0.7%

How To Trade This Event Risk

Looking back over the market’s reaction to the last three retail sales reports from Canada, it is clear that there needs to be more at work than a mere surprise between the actual number and the official forecast to trade this event risk successful. One consideration that has proven its influence on the reaction to the retail sales gauge in the past is the wholesale report. For September, the wholesale report could have a modest impact on its retail counterpart as the former rose 1.1 percent versus expectations of no change and a 1.9 percent drop in the previous month. On the other hand, with the correlation having broken down over the past two months, this indicator’s sway over expectations is dubious at best. Another, far more influential facet to consider setting up a possible fundamental trade is the general direction and interest in the Canadian currency just ahead of the release. In the past, the steady appreciation in the Canadian dollar (especially during times when momentum was rising) has overwhelmed event risk traders and left the currency to continuation moves. This could add an extra level to the discretionary aspect of whether or not to take the trade, as well as placement of the stop and profit target. Looking at the market right now, technicals show a sharp ‘V’ bottom and an 800-point rally in USDCAD.

Considering the upside momentum in this pair, trading a strong retail sales figure would be going against trend and could easily fade into the background. What’s more, recent developments in data and the Bank of Canada’s stance on monetary policy may further impede a strong reaction from the Canadian dollar to a jump in retail sales. During the G20 summit this past week, BoC Governor David Dodge hinted to the public that they should prepare for a possible rate cut in the near future as the downside to global growth counterbalances inflation pressures. Adding to this pressure, the consumer inflation data released today has defied the central bank’s forecasts for a 3.0 percent figure by year end before cooling to 2.0 percent. Headline inflation unexpectedly dropped to 2.4 percent while core pressures have dropped below the 2.0 percent target. Considering all of this, we will look for a very big jump in spending to take a short trade. If we get a large jump in spending and five minute red candle we will short two lots of USDCAD with a stop at the nearby swing high and profit target on the first lot equal to this risk. The second objective will be based on discretion and its stop will be moved to breakeven upon booking T1.

On this same premise, a weaker than expected spending number would suggest growth and inflation are making it easier for the central bank to move to cut the overnight lending rate. We will use the same trade setup for the long as we did for the short, just in reverse.