Will Canada Retail Sales rebound?

The Canadian dollar edged higher in Asia as it drives towards the 1.23 line. USD/CAD is currently trading at 1.2329, down 0.33% on the day.

Retail Sales expected to rebound

The Canadian dollar has taken advantage of US dollar weakness this week. On Thursday, USD/CAD fell to 1.2288, its lowest level since June 28th. The currency faces another important test later in the day, with the release of Canada retail sales reports for August.

Consumer spending disappointed in July, as headline retail sales fell 0.6% and core retail sales declined 1.0%. A strong turnaround is projected for July, with estimates of 2.0% for the headline read and 2.8% for the core release. Solid readings would point to renewed consumer spending and would likely give the Canadian dollar a boost. The currency has enjoyed a sparkling October, up 2.76%. An increase in risk appetite and a sharp increase in oil prices have boosted the Canadian dollar.

The Bank of Canada meets next week, and as is the case for many other central banks, inflation will be at the top of agenda. September CPI climbed 4.4% (Y0Y), above the 4.1% gain in August. The surge in inflation is a result of cost increases due to supply-chain disruptions and higher energy costs, and BoC policy makers are keen on containing inflation before it threatens to overheat the economy.

Still, a hike in interest rates appears a long way off, even with inflation heading higher. BoC Governor Tiff Macklem has acknowledged that inflation will persist longer than previously anticipated, but there are no indications that the bank has abandoned its view that the current bout of inflation to be transitory.

The BoC holds a policy meeting next week and the bank could scale back its bond purchase programme, which it has trimmed three times this year and now stands at C$2 billion/week. The September policy meeting took place around the national election and the bank refrained from any major moves at such a sensitive time. Next week’s meeting provides better timing for a taper, although the cautious BoC could decide to wait a bit longer. The bank has said that it will fully wind up the bond purchase scheme before raising interest rates, and a hike is not expected before 2023.

 USD/CAD technical

• USD/CAD is putting pressure on support at 1.2300. Below, there is support at 1.2238.

• There is resistance at 1.2462, followed by 1.2562.