[Closed +73 pips] NZDCAD: Riding the Wave of Canadian Disinflation
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Monday, August 19, 2024, Week 34
The NZDCAD currency pair is chosen for this trade plan due to the upcoming release of the Canadian CPI data, which is expected to significantly impact the Canadian dollar. The report is also relevant to the New Zealand dollar, as the RBNZ's recent rate cut has made the NZD sensitive to shifts in global risk sentiment and interest rate differentials.
The near-term outlook for this plan is defined as a five-day period, the short-term outlook is five weeks, the mid-term outlook is five months, and the long-term outlook is five years. These definitions align with the typical time horizons considered by forex traders when making trading decisions.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Canadian Inflation: A Crossroads for the Loonie
In the past six months, the most notable shift in Canadian economic indicators has been the notable decline in inflation. After peaking at 6.2% in June 2022, it has since moderated to 2.7% in June 2024, signalling a disinflationary trend. Coupled with a softening labour market, this trend prompted the Bank of Canada (BoC) to reduce interest rates in June and July, contributing to the weakening of the Canadian dollar against its New Zealand counterpart.
The NZDCAD currency pair's impact on intermarkets is primarily attributed to its correlation with commodity prices, particularly dairy prices for the NZD and oil prices for the CAD. A stronger NZDCAD often coincides with higher dairy prices and weaker oil prices. These fluctuations can significantly influence the agricultural commodity market, energy stocks, and related sectors.
The upcoming release of the Canadian CPI data for July is expected to show a further easing of inflation, with the consensus forecast at 2.7%. This could reinforce expectations for additional BoC rate cuts, potentially weakening the Canadian dollar further. The BoC's latest Monetary Policy Report indicated that the central bank expects inflation to decrease in the second half of the year due to base effects for gasoline prices, before steadying at the 2% level in 2025. This suggests that the BoC is likely to maintain an accommodative monetary policy stance in the near term, which could weigh on the Canadian dollar.
Upcoming Pivotal Events
Tuesday, August 20, Week 34: Release of Canadian CPI data for July. A weaker-than-expected reading could trigger a sell-off in the CAD, while a stronger-than-expected reading could support the CAD.
Wednesday, August 21, Week 34: Release of the FOMC minutes. A hawkish surprise could trigger a broad USD rally, potentially impacting the NZDCAD.
Friday, August 23, Week 34: Fed Chair Powell's speech at the Jackson Hole Economic Symposium. A hawkish tone could trigger a broad USD rally, potentially impacting the NZDCAD.
Riding the Wave of Canadian Disinflation
Pre-CPI Positioning: A Cautious Approach
The NZD/CAD could be traded cautiously long prior to the release of the Canadian CPI data. The recent rate cut by the RBNZ and the BoC's dovish stance suggest that the interest rate differential between the two countries is likely to narrow further, potentially supporting the NZD/CAD. However, the trade should be approached with caution, as a stronger-than-expected CPI reading could trigger a reversal in the pair's recent uptrend. Conviction level: Moderate.
Post-CPI: Capitalising on a Dovish Surprise
If the Canadian CPI data for July comes in below the consensus forecast of 2.7%, the NZD/CAD could be traded aggressively long. A weaker-than-expected CPI reading would reinforce expectations for additional BoC rate cuts, potentially weakening the Canadian dollar further and supporting the NZD/CAD. Conviction level: High.
Post-CPI: Navigating a Hawkish Surprise
If the Canadian CPI data for July comes in above the consensus forecast of 2.7%, the NZD/CAD could be traded short. A stronger-than-expected CPI reading would challenge expectations for additional BoC rate cuts, potentially supporting the Canadian dollar and weakening the NZD/CAD. Conviction level: Moderate.
Navigating the NZDCAD: A Trader's Roadmap
The NZDCAD is currently at a pivotal juncture, with the upcoming release of the Canadian CPI data for July likely to significantly impact the pair's direction. A weaker-than-expected CPI reading could trigger a continuation of the pair's recent uptrend, while a stronger-than-expected reading could lead to a reversal. Forex traders should closely monitor the release of the Canadian CPI data and the BoC's policy pronouncements for clues about the future direction of the NZDCAD. Key takeaways include the potential for further narrowing of the interest rate differential between New Zealand and Canada, the impact of global risk sentiment on the NZD, and the sensitivity of the CAD to oil prices and the US economic outlook.
Sources
Bank of Canada
Statistics Canada
Reserve Bank of New Zealand
Trading Economics
Bloomberg