USD/CAD drifts lower as Canadian Retail Sales surprise to the upside
- USD/CAD extends its decline as strong Canadian Retail Sales and broad USD weakness lift the Loonie.
- US Dollar remains pressured by policy uncertainty and Fed independence concerns.
- Focus shifts to US PMI data, UoM sentiment and next week’s BoC and Fed meetings.
The Canadian Dollar (CAD) extends gains against the US Dollar (USD) on Friday, supported by a broadly softer Greenback and stronger-than-expected Canadian Retail Sales data. At the time of writing, USD/CAD trades around 1.3767, marking a fifth consecutive daily decline.
Data released by Statistics Canada showed that Retail Sales rose 1.3% MoM in November, beating market expectations of 1.2% and rebounding sharply from October’s 0.3% decline.
Retail Sales excluding autos were even stronger, climbing 1.7% on the month, above forecasts of 1.2%, after falling 0.6% in October.
The rebound in retail activity supports the Bank of Canada’s (BoC) wait-and-see approach after inflation data released earlier this week showed easing monthly price pressures, even as annual inflation remains sticky above the BoC’s 2% target. On a yearly basis, CPI accelerated to 2.4% in December from 2.2% in November, while the BoC’s core CPI measure eased slightly to 2.8% from 2.9%.
Markets widely expect the BoC to keep its policy rate unchanged at 2.25% at next week’s meeting. In its December policy statement, the BoC said that ‘if inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment.’
The central bank also stressed that ‘uncertainty remains elevated’ and added that if the outlook shifts materially, it stands ‘prepared to respond.’”
Steady Oil prices add another layer of support to the Loonie, given Canada’s status as a major energy exporter. West Texas Intermediate (WTI) trades around $61 per barrel, up nearly 2.7% on the day.
Meanwhile, the US Dollar remains under sustained pressure despite some easing in US-EU trade tensions, as President Trump’s protectionist trade agenda and growing interference with the Federal Reserve’s (Fed) independence continue to weigh on investor sentiment.
Preliminary S&P Global Purchasing Managers Index (PMI) data showed Manufacturing PMI rising to 51.9 in January from 51.8, below expectations of 52.1, while Services PMI came in at 52.5, unchanged from December but below the 52.8 forecast.
Looking ahead, traders await the release of the University of Michigan Consumer Sentiment survey, along with inflation expectations data. Markets are also widely expecting the Fed to keep interest rates unchanged at its January 27-28 monetary policy meeting.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.