On Thursday, at 8:30 EST, the Statistics Canada (STCA) will publish the country’s GDP numbers for November 2012. The market is expecting a +0.2% read for this indicator (relative to October).
There are two possible trades here:
1. If you have a view on Canadian GDP in November, then buy or sell USD-CAD in advance to capitalize on any deviation from the consensus.
Naturally, a large inflow of money into the CAD in recent months as a safe-haven solution may mute much of the surprise impact, but since the CAD does tend to react with a statistically significant magnitude to such surprises, we still believe that there is a trade there.
Note that this is should be played as either a very short-term trade or a longer term one.
If a very short-term trade, then reading part 2 below will explain why you should be ready to unwind the position not more than one hour after announcement. Therefore, must be very sensitive to the market here so you are not caught in the reversal.
A longer-term trade should also take into account the inflows and outflows of money into and out of the CAD as a response to news about the American economy, Canada’s most significant trade partner.
2. If you don’t have a view on GDP, but are looking for a day trade, an interesting trend in USD-CAD is worth exploring.
Typically, much of the GDP surprise impact vanishes on the day of announcement. That means that even if there is a GDP surprise and the USD-CAD moves in a certain direction as a reaction to the number, the trend tends to reverse by the end of the day.
Sometimes the overreaction end in a complete reversal and sometimes the reversal is partial, but in the last 2 years or so, this happened time and again (with Canadian GDP published monthly, there is enough of a sample to establish that).
Therefore, being ready to trade on the back of a GDP surprise reaction is also a strategy worth exploring in our view.
If the surprise is negative, then this is bad news for the CAD, which will result in a spike in USD-CAD. Wait for the reversal of the reaction (historically, about an hour after the number is published) and join the trend of reversion to the initial value and sell the USD-CAD. If the surprise is a positive one, then do exactly the opposite – wait for the spike down and then buy the USD-CAD to capitalize on the reversal.
Either way, we suggest not rushing into these trades. As mentioned, Canadian GDP is published monthly so another opportunity to trade on its back, will come soon enough.