Canadian dollar drifting ahead of retail sales

• Canada’s retail sales expected to fall to zero

The Canadian dollar is showing limited movement for a second straight day. In the European session, USD/CAD is trading at 1.3496, down 0.13%.

Markets brace for stagnant retail sales

Canada releases retail sales for November later today, and the markets are expecting no growth, following a 0.7% gain in October. Retailers tried to entice shoppers with discounts in November such as Black Friday, but unless there is a huge surprise from today’s retail sales, shoppers held the purse strings tight in November.

Canada’s economy contracted in the third quarter and a weak retail sales report will weigh on fourth-quarter GDP, which at best is expected to show minimal growth. The economy has cooled down due to the Bank of Canada’s aggressive tightening which has done a good job of curbing inflation, although December CPI surprised by rising to 3.4%, up from 3.1%.

The BOC has maintained the cash rate at 5.0% for three straight times and barring further acceleration in inflation, the rate-tightening cycle is over. The key question is the timing of a rate cut. The BoC would love to chop rates and kick-start the weak economy, but a rate cut appears unlikely unless inflation moves closer to the 2% target.

The Fed continues to push back against expectations of a March rate cut and the markets have had to sharply lower the odds of a quarter-point cut in March to 54%, down from 77% just one week ago. US economic data remains surprisingly strong, with the latest evidence coming from retail sales on Wednesday. The December report showed a gain of 0.6% m/m, following 0.3% in November and above the market estimate of 0.4%. This was the strongest gain in three months. A day before the retail sales report, Fed Governor Christopher Waller said the strong economy was giving the Fed “the flexibility to move carefully and methodically” on monetary policy.

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USD/CAD Technical

• There is resistance at 1.3499 and 1.3554
• 1.3452 is under pressure. Below, there is support at 1.3397

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