Trade Idea: Short The USDCAD Ahead Of Friday's Data

| About: CurrencyShares Canadian (FXC)

The CAD (NYSEARCA:FXC) was one of the worst performing currencies over the past day, losing 0.841% of its value. Against major currency pairs, it was only outdone in % Price Movement terms by the GBPJPY and NZDUSD.

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Source: OANDA.com

This sell-off in the CAD was part of a broader market rally, with the USD rallying against all major currencies in the wake of the FOMC meeting. In the correlation graph below, other than the EURGBP, the CAD's fall in the past 24 hrs was correlated with rallies in the USD against a variety of pairs.

Source: MyFXBook.com

In daily, weekly and monthly terms the USDCAD is trading at the top end of its range.

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Source: MyFXBook.com

Friday is a Big News Day for Canada

Thursday and Friday are the most volatile days in the CAD due to end of the week news releases. Friday's volatility has been 0.1728%, slightly lower than Thursday's 0.1825%.

This Friday is no different with two major news releases at 05:30 PT, the first being the Bank of Canada Consumer Price Index (CPI), the second Retail Sales. These numbers will be especially important in the wake of Canada creating 95,000 jobs on June 7th, the largest number of jobs created since 2002. If this jobs number is followed up by improving CPI and Retail Sales, there is significant room for the CAD to go higher in the short term, especially given its oversold state.

CPI has been trending downwards since reaching 2% last summer. The past summer's relatively elevated reading versus the rest of the world created much speculation of an interest rate hike, raising the value of the CAD to above parity. If the CAD were to see the CPI continue to fall, there would be the opposite effect, acting as a catalyst for a lower CAD in anticipation of monetary stimulus. The consensus forecast is for a modest increase of 1.2%.

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The month over month Retail Sales numbers are forecasted for an increase to 0.3%. After a surprise beat in Retail Sales this past April, the CAD rallied significantly. An upside surprise will be something to watch for, especially with the strong jobs numbers, as people with jobs consume.

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Working against Retail Sales is a Statistics Canada report released today that showed that Canadian households deleveraged this past quarter. From the release:

Leverage, as measured by household credit market debt to disposable income, was 161.8% in the first quarter, down from 162.6% in the fourth quarter of 2012. This marks the second consecutive quarterly decline. Owner's equity as a percentage of real estate increased slightly to 69.2%.

On the whole, I still see a greater probability of a surprise to the upside, especially with the rampant consuming I see around Vancouver.

In terms of market positioning leading into Friday's events, speculators are largely short the CAD according to the Commitment of Traders report, although not overextended in their position. The fact that there is not an overextended short positioning limits the upside potential in the move in the event of overwhelmingly positive CPI and Retail Sales numbers.

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The Trade

I've put this trade on already (the "S" in the chart below), and this is how I'm playing it.

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The red line is my stop loss, the green line my take profit, the horizontal yellow line is the release of the CPI and Retail Sales numbers. I expect the USDCAD to trade in the highlighted blue range leading up to the release, then to see a big move to the downside (rally in the CAD) upon the release of the numbers.

With my entry at 1.0375, the reward to risk ratio is 1.35. This is lower reward to risk ratio than the 3:1 ratio I typically target, but given the oversold position in the CAD, I'm comfortable tightening up my take profit. Also, with the extreme volatility in currency markets as of late, I want to get in and get out as quickly as possible, which means tightening up my take profits rather than letting trades run. And finally, I am extremely bearish the CAD in the longer term and expect it to reach 1.10 by this time next year. Since I'm trading against what I consider the trend, it is another reason to be in and out quickly.

In terms of how I picked the stop loss and take profit levels, I largely based it on positioning on OANDA's books. As you would imagine, majority of the orders are clustered around the big figures. Therefore, 1.0460 is far enough outside the big figure to allow for volatility, and 1.0260 is the next level of buy orders after 1.03.

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As I submit this article for publication there is 7hrs 52min until the releases. We'll find out soon enough how the trade works out.

Disclosure: I am short FXC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am actively trading FOREX and CFDs and may either be long or short the instruments discussed at the time of this article's publication. To see a complete list of my open trades in real time, visit mcnultycapitalmanagement.com.