Canadian Dollar gets a boost from strong Retail Sales

The Canadian dollar is higher on Friday. In the European session, USD/CAD is trading at 1.4342, up 0.30% on the day. There are no Canadian events today and the US will release manufacturing and services PMIs.

Canada’s Retail Sales jump 1.6% in December

The Canadian dollar is in positive territory today after a sparkling retail sales report. The  advance estimate for December  showed a gain of 1.6% m/m, which would be the highest monthly pace since January 2023. There are two reasons for the sharp gain. First, consumers have reacted positively to the Bank of Canada’s agressive rate cuts and inflation has slowed. Second, the government announced a federal sales tax holiday on a number of items which started in mid-December and runs until February. The tax holiday provided a big lift to December spending which should be reflected in solid retail sales for the fourth quarter. The BoC also noted that the tax holiday likely had a short-term in pushing inflation higher .November’s retail sales where nowhere near as impressive, with a flat 0% reading, short of the market estimate of 0.2%.

The Bank of Canada has been aggressive in its easing cycle, chopping borrowing costs by 175 basis points since June 2024, including two consecutive oversize cuts of 50 basis points in October and December.  The cash rate of 3.25% is much lower than the Federal Reserve’s rate of 4.25%-4.50% and the BoC will be keeping a close eye on the Fed’s rate path in 2025. All indications are that the Fed may cut just once or twice this year, and if the BoC is more aggressive than the Fed, the USD/CAD rate differential will widen even further, which would weaken the wobbly Canadian dollar.

USD/CAD technical

• USD/CAD has pushed below support at 1.4378 and is testing support at 1.4341.

• There is resistance at 1.4421 and 1.4458.