Volatility is on deck for the Canadian dollar as we will receive inflation and Consumer Price Index (CPI) data this morning as the trading session in the domestic US gets underway.
As a general strategy, highly volatile price moves present a binary trader an opportunity to take a position on either side of a trade expecting swings that would allow the potential for one trade to be successful which pays for both sides and offers a potential return.
Last month, the Canadian CPI number was marginally disappointing, and we saw a material and consequential reaction in the price of USDCAD. It is generally assumed that high CPI and inflation supports a hawkish monetary policy and is bullish for a particular currency.
Looking deeper at last months release for guidance on possible moves today, we see meaningful market moving volatility. The data was released at 8:30 am EST on June 23rd, and the consensus forecast was for annualized inflation of 1.5%, while the actual number delivered was 1.3%. In the one hour following the release we saw a move in the USDCAD pair of roughly +80 pips, and by the close the net change for the day was roughly +50 pips. The price action following the release on June 23rd can be seen on the 15 minute chart below, with Average True Range indicator and Bollinger bands added to show volatility.
With no recovery in energy prices and with continued softness in pricing generally, we could see an extension of lower inflation numbers from Canada, which could call into question the timing of future rate hikes. Based on the recent moves in the USDCAD pair, this could provide the fuel for a potentially strong correction today.
If we see inflation at the 1.3% number or above, indicating a stable number in the target area of the Bank of Canada’s (BoC) target of 1-3%, it could provide additional momentum for a continuation for the price direction we have seen lately in this pair, especially since the BoC recently raised rates. A strong inflation number could be seen as confirmation of another rate hike from BoC soon.
As a backdrop, we also have a pivotal rig count report today from Baker Hughes around midday, and with the Canadian Dollars correlation with oil prices, this could provide additional influence on the pair, although the oil news impact should be somewhat muted compared to the CPI release.
A binary trader considering an opportunity for a volatility based trade would look at taking positions both above and below the current spot rate as of 6 AM EST at 1.2573. For example, a trader expecting large swings in this pair today similar to the 80 pip move we saw on the last release, could potentially capitalize on the market trading in either direction.