USD/CAD testing 1.2600 level, as bears eye 2021 lows

• USD/CAD is back within striking distance of 2021 lows at 1.25889 and is testing the 1.2600 mark.
• CAD seems to be deriving support from a sharp rise in Canadian bond yields.

USD/CAD is back within striking distance of 2021 lows at 1.25889 and is testing the 1.2600 mark. US bond yields continue to rally, with the US 10-year yield now up over 6bps on the day and above the 1.35% level. Upside seems to be as a result of increasing fears that the global (and namely US) economies are going to “over-heat” later on in the year/in 2022 as a result of 1) the unprecedented amount of fiscal and monetary stimulus unleashed in 2020 to combat Covid-19 pandemic induced economic weakness and 2) vaccines bringing the pandemic under control and unleashing more than a year’s worth of pent-up demand.

This, markets seem to fear, will result in central banks having to abandon accommodative policy earlier than expected, hence the sell-off in bonds. Global bond markets are now getting some contagion from US markets; Canadian 10-year yields are up 7bps on the day to above 1.21% and are now up nearly 20bps on the week. This seems to be giving the Canadian dollar some tailwinds at the end of the week. The same can be said for AUD and NZD, which have eyes on rising Australian and New Zealand yields.

CAD has thus shrugged off bearish impulses from lower crude oil prices, which have been coming off the boil on the final trading day of the week as weather-related production disruptions in the south of the USA abate, and from very weak Retail Sales number for December.

Retail Sales disappointment

Stats Canada released December Retail Sales growth data at 13:30GMT, which came in significantly worse than expected. Headline Retail Sales volumes were down 3.4% MoM, worse than forecasts for a drop of 2.5%, whilst Core Retail Sales saw an even steeper 4.1% MoM drop, missing expectations for a more modest 2.0% decline. Meanwhile, Stats Canada forecast a drop of 3.3% MoM for headline retail sales in January.

The lower than usual holiday season spending can most likely be explained by the implementation of tighter Covid-19 lockdown restrictions, but with non-essential stores reopening as of February, Retail Sales ought to rebound in Q1 2021. “As the vaccination process ramps up”, comment Capital Economics, “we expect total consumption to rebound strongly later this year”.