Canadian dollar calm ahead of Retail Sales

The Canadian dollar continues to tread in choppy waters, as it trades slightly above the symbolic 1.25 line.

The week will wrap up with Canada releasing retail sales, the primary gauge of consumer spending. For November, the headline reading is expected to slow to 1.2% y/y (1.6% prior) and core retail sales are forecast to remain unchanged at 1.2%.

Canadian provinces have renewed tough health restrictions in a bid to curb the spread of Omicron, which is dampening restaurant and entertainment activity. GDP growth will be affected by the restrictions, and expectations are that Canada will show marginal or no growth in the first quarter. The good news (hopefully) is that pent-up demand will translate into strong growth once the Omicron wave subsides.

Despite the toll that Omicron has inflicted on the Canadian economy, the markets are expecting the Bank of Canada to act at next week’s policy meeting. A quarter-point hike has been priced in at around 70%, even though at its meeting, the BoC is expected to revise lower its growth forecast for Q1.

Canadian inflation hits 30-year high

Financial headlines announcing that inflation has surged to 30-year highs are becoming more common. First, it was US inflation, followed by the UK just this week, and now Canada has joined the club. In December, headline CPI rose to 4.8% y/y, the highest level since a 5.5% print back in September 1991.

The jump in inflation has raised expectations that the BoC will press the rate trigger at next week’s meeting. Inflation has now overshot the bank’s inflation target of 1% to 3% for nine straight months.  Higher oil prices are also contributing to inflation, but we could see some relief as oil futures indicate that oil prices will ease in the first half of this year.

USD/CAD technical

• There is support at 1.2434, which has held since mid-November. Below, there is support at 1.2322

•  There is resistance at 1.2678 and 1.2810