Canadian dollar eyes retail sales

The Canadian dollar continues to rally and has gained over 1% this week. We’ll get a look at Canadian retail sales later in the day.

Retail sales predicted to bounce back 

After a rough start to the week, the Canadian dollar has reversed directions and posted three winning days, as the US dollar has retreated against the majors. The war in Ukraine has sapped risk appetite, which has weighed on the Canadian dollar. However, this has been largely mitigated by the surge in oil and other commodities prices, as Canada is a major exporter of commodities.

The Canadian currency’s upswing could well continue on Friday if retail sales for January perform as expected. Both the headline and core readings are expected to climb 2.4% MoM. In December, Retail Sales fell by -1.8% and Core Retail Sales plunged -2.5%, as holiday shopping was hampered by the Omicron virus.

The Federal Reserve finally pressed the lift-off button for a rate-tightening cycle, and the Bank of Canada is expected to follow suit. Both central banks are under pressure to relieve sizzling inflation, which has hit 40-year highs in Canada and the US.  The markets have priced in up to six more hikes this year, as the BoC will have to be aggressive in order to wrestle inflation back to its target range of one-to-three per cent. The quandary for Bank policymakers is that inflation is not being fed by economic growth, and fears of stagflation means that the BoC will have to be cautious to avoid choking off growth due to sharp rises in interest rates.

With the FOMC meeting out of the way, the markets are refocused on the war raging in Ukraine. Russia continues its assault even while negotiating, but the markets are hoping that this time the talks will lead to a breakthrough that will end the fighting. We’ve seen these hopes dashed before, but the optimism has renewed risk appetite and pushed the US dollar lower. Any signs of progress in the talks will likely extend the US dollar’s downswing.

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USD/CAD Technical

• USD/CAD faces resistance at 1.2653 and 1.2777
• There is support at 1.2562 and 1.2438

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