Canadian dollar calm ahead of retail sales

• Canada to release retail sales later today
• Fed’s Powell says inflation still too high, lower growth needed

The Canadian dollar has edged higher on Friday. In the European session, USD/CAD is trading at 1.3688, down 0.23%. Canada releases retail sales later today, which could result in volatility from the Canadian dollar.

Canada’s retail sales expected to decline

Canada wraps up the week with the August retail sales report. The markets are bracing for a deceleration, with an estimate of -0.3% m/m, compared to a 0.3% gain in July. On a year-to-year basis, retail sales are projected to slow to 0.2%, down sharply from 2.0% in July.

The Bank of Canada is widely expected to hold rates at 5.0% for a second straight time at the October 25^th meeting. The BoC has raised rates to high levels but has only hiked on two occasions in 2023, which indicates that on the whole,  interest rates are where the central bank wants them.

I don’t expect to see the BoC trimming rates before mid-2024, but at the same time, the BoC will do its utmost to refrain from further tightening. The takeaway message is that we should expect rates to remain in restrictive territory for some time yet.

Last week’s inflation report showed a decrease of -0.1% for both headline and core CPI in September,  which beat expectations. On a year-to-year basis, headline CPI dropped from 4.0% to 3.8% and the core rate eased to 2.8%, down from 3.3%.

Fed Chair Jerome Powell said on Thursday that inflation remained too high and that the 2% target would be difficult to reach if economic growth did not cool. Powell didn’t provide any hints about future rate policy, saying that rate decisions would be based on data and the economic outlook. The Fed has been sending out a “higher for longer” message, and Powell’s focus on high inflation seemed to reiterate this stance.

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USD/CAD Technical

• USD/CAD is testing support at 1.3643. Below, there is support at 1.3585
• There is resistance at 1.3716 and 1.3774

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