Trading the News: Canadian Gross Domestic Product (JAN)

What’s Expected
Time of release: 03/31/2008 12:30 GMT, 08:30 ET
Primary Pair Impact : USD/CAD
Expected: 0.4%
Previous: -0.7%

How To Trade This Event Risk

The January Canadian GDP release may not have the same market moving potential as December’s reading which was reinforced by the quarterly number. However, the significant jump in growth that is expected leaves significant margin for error which may provide a strong enough response to warrant a trade. The evidence continues to mount that the Canadian economy may be able to shrug off a slight recession in the U.S. The recent commodities boom has fueled job growth, which saw the region add another 43,000 jobs last month. Also, stronger than expected retail sales and a buoyant housing market has started to abate recession worries. Additionally, credit markets have remained strong with household credit rising at an annual rate above 10%. This strength has lead many to speculate that the BoC has cut rates too fast in attempt to keep up with the U.S. The central bank may have evidenced this recently, when they removed liquidity from the market by selling $250 million in government securities through a special sale and repurchase agreement, in order to bring the overnight interest rate to its target of 3.5%. The USD/CAD has been consolidating, as traders have been pricing in a 50 point cut from both the BoC and the Fed. However, if the Canadian economy continues to remain resilient expectations will decrease that they will follow their neighbors to the south in cutting rates further.

Considering the survey number for January’s GDP has recently been revised higher, it wouldn’t be out of the question to see the number exceed expectations. When looking for a long Canadian dollar position (short USDCAD), we will look for data that suggests the economy is immune to a U.S slowdown and the BoC can slow its pace of easing monetary policy. A positive reading of 0.6% would be the highest in almost two years and validate the economy’s resiliency. If we have this bullish fundamental mix, we will look for a red, five-minute candle to confirm entry on two lots of USDCAD at market. Our stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise) and the first lot’s target will be immediately set equal to this initial risk. The second target will be determined by discretion (with a consideration for support that may be building up around 0.97). To preserve profit, we will move the stop on the second lot to breakeven when the first takes profit.

Alternatively, a less than expected increase in growth could quickly stoke fears of a 50 bp cut at the next policy meeting. For a short we will look for a growth to remain flat or slightly improved and follow the same setup as the short, just in reverse.

David Rodriguez is a Currency Analyst at FXCM.