Canadian dollar eyes retail sales

USD/CAD has edged lower on Tuesday. In the European session, USD/CAD is at 1.3626, down 0.19%. We could see stronger movement in the North American session when Canada releases the November retail sales report.

Will retail sales bounce back?

Canada’s retail sales were soft in October, as the headline reading came in at -0.5% and core retail sales at -0.7%. The markets are expecting a mixed report for November, with a consensus of -0.3% for the headline and 0.8% for core retail sales. This will be followed on Wednesday with the CPI data for November, with headline inflation expected to rise to 7.4%, up from 6.9% a month earlier.

The Bank of Canada will be following the retail sales and inflation data carefully. The BoC raised rates by 50 basis points earlier in December, bringing the cash rate to 4.25%. The Bank’s current rate cycle has been steep, with 425 points of tightening in just nine months. BoC Governor Macklem expressed a mea culpa on Monday, admitting that the BoC had missed the boat on rising inflation, which was a “very big forecast error.” Still, Macklem said that a turnaround in inflation was near.

Over in the US, the Federal Reserve continues to battle with investors, who are not listening to the Fed’s hawkish message and received a cold shower from a hawkish Fed meeting last week. Former New York Fed President Dudley emphasised this point on Monday, warning that investors were ignoring the Fed at their peril, as the Fed would simply continue to tighten if it saw that conditions were becoming too loose. The Fed has projected a terminal rate of 5.00% to 5.25%, a view seconded by Goldman Sachs. However, the money markets have priced in a terminal rate of 4.88%, somewhat more dovish than the Fed.

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USD/CAD Technical

• There is weak resistance at 1.3681. The next resistance line is 1.3766
• USD/CAD has support at 1.3596 and 1.3484

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