Canadian dollar extends losses

The Canadian dollar continues to lose ground on Thursday. In the North American session, USD/CAD is trading at 1.3461, up 0.50%.

Soft data weighs on Canadian dollar

Weak Canadian releases are weighing on the Canadian dollar, which is down about 1% this week. Housing Starts fell to 215 thousand y/y, down from 248,000 (est. 240,000) and the lowest level since October 2020. Manufacturing Sales came in at -1.5% m/m, down from -0.2% (est. -1.8%).

The Bank of Canada raised rates by 25 basis points in January, bringing the cash rate to 4.50%. At the meeting, the BoC signalled that it would hold rates at this level while it assessed the impact of its steep rate-tightening cycle. Inflation dropped to 6.3% in December, down from 6.8% and the lowest since February 2022. The battle with inflation isn’t won yet, but the BoC is quite optimistic, projecting that headline inflation will drop to just 2.6% in 2023. Lower inflation is unlikely to lead to rate cuts as long as wage growth, a key driver of inflation, remains strong.

The BoC doesn’t have it easy when it comes to establishing rate policy, since Canada’s economy is so heavily dependent on the US. Currently, signs are pointing to the US experiencing a mild recession, but a more severe downturn in the US economy would dampen Canada’s export-reliant economy.

In the US, we continue to see stronger-than-expected releases. The US Producer Price Index slowed to 6.0% in January, down from 6.5% but stronger than the estimate of 5.4%. This follows the January CPI report that ticked lower to 6.4% but was higher than the 6.2% estimate. Retail sales delivered an impressive gain of 3% in January, above the estimate of 1.8%. This was a strong rebound from the December reading of -1.1% and marked the largest gain since January 2022.  These strong numbers have boosted the US dollar, as the Fed will likely raise rates higher and for longer in order to put the brakes on the resilient economy and bring down inflation.

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USD/CAD Technical

• USD/CAD is testing resistance at 1.3439. Next is resistance at 1.3528
• 1.3386 and 1.3297 are providing support

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