Canadian dollar to decline on weak retail sales data

A series of positive economic data and the rise in the price of crude oil enabled the Canadian dollar to consolidate against the Japanese Yen in the past four months. The CADJPY pair touched a high of 88.795 on 24 th of April, from a low of 78.939 hit on the first week of January. However, the CADJPY pair lost steam and declined to close at 83.94 on Friday. The recent developments, discussed below, indicate that the CADJPY pair would decline further.

The Canadian economy is once again facing a downturn. In March, the exports declined 4.8% to C$41 billion. Ten of the eleven major sectors saw a decline in the business activity.

Last Friday, the Statistics Canada announced that the retail sales declined 1% in March to C$43.76 billion (33.39 billion). Of the eleven sectors tracked, automobile and spare parts sales saw a 2.9% drop in the retail sales. Similarly, furniture and home furnishing stores recorded a 3.7% decrease in the sales. The analysts had expected a 0.6% decline in the retail sales.

CCTV News

The recent wildfire in the Canadian oil sands region (Alberta) is expected to have a negative impact on the overall growth.

Statistics Canada also reported a rise in the inflation rate to 1.7% in April. The data were in accordance with the analysts’ expectations. Furthermore, the core inflation rate stood at 2.2%. Food and shelter contributed to a rise in the inflation rate. However, the Central bank stated that the increase in the inflation was led by temporary factors. Thus, the positive inflation data were largely discarded by the market. Most analysts believe that the growth would return only in the second part of the year.

In the meanwhile, the US Treasury Department stated that its Secretary Jack Lew asked his Japanese counterpart Taro Aso to avoid initiatives to devalue the currency in order to increase the competitiveness of the Japanese economy. The market would certainly perceive this as a non-approval to measures such as intervention in the forex market. Thus, we can look forward to a decline in the CADJPY currency pair in the next few weeks.

The CADJPY currency pair continues to move within the declining channel and below the 50-day moving average. The RSI reading has fallen below the 50-level. Thus, it can be argued that the currency pair would once again test the major support at 81.50.

So, a forex trader should look forward to sell the CADJPY currency pair at this point in time. While going short, a stop loss order can be placed above 86. The short position can be closed near 81.50 levels.

Under this scenario, picking up a one touch put options contract would be the ideal solution for a binary options trader. The trader should consider choosing a target level of 82 or higher for the binary options contract. Similarly, a four week expiry period would provide more than sufficient time for the price movement to hit the target.

---