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Canadian Dollar Dips as Retail Sales Disappoint

The Canadian dollar has extended its losses on Friday. USD/CAD is trading at 1.3569 in the North American session, up 0.29%.

Canada’s retail sales slip in January

Canada’s retail sales fell 0.3% m/m in January, revised from the earlier estimate of -0.4% and well off the 0.9% gain in December. The decline was driven by a sharp drop in motor vehicles and parts dealers (-2.4%).

The silver lining was that six of nine sub-categories showed an increase, which points to some strength in consumer spending. The estimate for February retail sales stands at 0.1%. Year-to-year, retail sales rose 0.9% in January, shy of the forecast of 2.5% and well off the December gain of 2.9%.

The retail sales data comes on the heels of the inflation report for February, in which inflation fell to 2.8% y/y. This was better than expected and the lowest rate since June 2023.
Core CPI, which excludes energy and food and is considered a better indicator of inflation trends, fell to 2.1% in February, which was lower than expected and the lowest level since March 2021.

With inflation continuing to fall toward the 2% target, pressure is growing on the Bank of Canada to lower rates and provide some relief to households, which are feeling the squeeze from elevated interest rates and the high cost of living.

The Bank of Canada has maintained the cash rate of 5.0% for six straight times and rates have likely peaked, although the BoC hasn’t signaled that it plans to lower rates.

The markets have priced in a rate cut in June at around 70% and other major central banks are moving in the direction of lowering rates. There is a 70% probability that the Fed will lower rates, according to the CME FedWatch tool, and the Swiss National Bank surprised with a rate cut on Thursday, the first major central bank to lower interest rates.

USD/CAD Technical

  • USD/CAD tested resistance at 1.3577 earlier. Above, there is resistance at 1.3611
  • 1.3518 and 1.3484 are providing support

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