USD/CAD: Trading the Canadian CPI May 2013

Canadian Core CPI, is considered on of the most important inflation indicators. Core CPI  excludes the most  volatile items  which are included in CPI, hence it is considered  a  more reliable measurement of inflation.  A reading that is higher than the market forecast is bullish for the Canadian dollar.

Here are all the details, and 5 possible outcomes for USD/CAD.

Published on Friday at 12:30 GMT.

Indicator Background

Core CPI differs excludes eight volatile components which are found in CPI, such as food and energy prices.  The index is important to currency traders, as the Bank of Canada may step in and adjust interest rates if inflation targets are not being met. A change in interest rates, in turn, will affect the strength of the Canadian dollar.

Core CPI  posted a modest 0.2% in April, matching the forecast. The forecast for the May reading is unchanged. Will the indicator surprise the markets and beat the estimate?

Sentiments and levels

The Canadian dollar  took a hit as the US dollar was broadly stronger, but the reason  for the greenback’s strength is positive: the US economy is improving (at least in terms of jobs), and this is positive for Canada, which  heavily relies on  US demand. In addition, the jobs report in Canada was good enough, and helps the Canadian dollar.  As well, the loonie has benefited from  the  price of oil.   Thus, the overall sentiment is bearish on USD/CAD towards this release.

Technical levels, from top to bottom: 1.0285, 1.0250, 1.0180, 1.0125, 1,01 and 1.0050.

5 Scenarios

1. Within expectations:  -0.1% to 0.5%: In this scenario, USD/CAD could show some slight fluctuation, but it is likely to remain within range, without breaking any  levels.
2. Above expectations:  0.5% to 0.8%: A reading above expectations could push the pair below one  support level.
3. Well above  expectations: Above 0.8%: An unexpectedly sharp rise in inflation could push USD/CAD downwards, breaking two or more levels of support.
4. Below expectations: -0.5% to -0.2%: A weak release could push USD/CAD upwards, with one  resistance level at risk.
5. Well below expectations: Below -0.5%: A reading deep in negative territory  would likely hurt the loonie, and the pair could break two or more  resistance levels.

For more on the Canadian dollar, see the USD/CAD forecast.

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