Canadian dollar extends slide

The Canadian dollar has started the week with losses, continuing the downswing we saw on Friday. USD/CAD is up over 1% since Thursday, as the US dollar is broadly higher against the major currencies.

The week ended on a sour note for the Canadian dollar, due to weak Canadian data. November retail sales were weaker than expected. The headline reading came in at 0.7% (1.2% exp.) and core retail sales rose 1.1% (1.3% exp.). As well, the New Housing Price Index slipped from 0.8% to 0.2% and missed the forecast of 1.0%.

If you’re guessing that these weak numbers will inhibit the Bank of Canada, guess again. The markets have priced in a whopping 85% likelihood of a rate hike at the bank’s Wednesday meeting. The drivers behind the expected hike are the usual suspects, employment and inflation. Employment is at a record level of 19.4 million and the unemployment rate fell below 6% in December, for the first time since the Covid crisis began.

Inflation is red-hot and has climbed to its highest level in 30 years, as December CPI rose 4.8% in December YoY. A recent BoC survey found that consumers and businesses expect inflation to remain high, and inflation expectations often manifest into actual inflation. A rate hike is close to a certainty, even though the BoC is expected to revise downwards its growth forecast for the first quarter.

This week’s highlight out of the US is the FOMC policy meeting on Wednesday. With inflation running at its highest level in almost 40 years, the Fed is poised to commence a series of rate hikes, with the likelihood of a March hike at 88%, according to FedWatch. The markets have priced in four rate hikes this year, but the Fed may have more in store. Goldman Sachs sent out a note on Saturday saying that its baseline forecast stands at four hikes, but the surge in inflation could push the Fed to respond with even more rate hikes this year.

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USD/CAD Technical

• • There is support at 1.2495 and 1.2405
  •  USD/CAD is testing resistance at 1.2632. Above, there is resistance at 1.2679

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