The Canadian dollar has started the week with losses. In the North American session, USD/CAD is trading at 1.3721, up 0.57%.
The week ended on a high note, as Canadian retail sales for August were stronger than expected. Retail sales posted a modest 0.7% gain, rebounding from -2.2% in July and beating the consensus of 0.2%. Core retail sales also rose 0.7% after a -2.2% reading in August and above the forecast of 0.4%. The turnaround boosted the Canadian dollar by close to 1%.
Consumer spending has stabilized, which has bolstered the case for the Bank of Canada raising rates by 75 basis points. As well, the BoC would like to keep pace with the Fed, which is expected to raise rates by 75 bp, so as to prevent the Canadian dollar from falling further against the U.S. dollar. The markets have priced in a 75bp move by the BoC at around 80%, which would bring the cash rate to an even 4%.
Markets Expect 0.75% Hike From BoC
The Bank of Canada has been aggressive in its rate-tightening cycle, with the reduction in inflation its Number One priority. Still, there are no clear signs that inflation has peaked. Headline inflation ticked lower to 6.9% in September, down from 7.0% in August. Still, the reading was higher than the consensus of 6.8%. Core inflation remains even more stubborn and rose unexpectedly to 6.0%, up from 5.8% and above the forecast of 5.6%.
The Fed has given no signals that it plans to ease up on rate hikes any time soon, and this hawkish stance was reaffirmed by Philadelphia Federal Reserve President Patrick Harker on Thursday. Harker said that higher interest rates had failed to curb inflation, and the Fed would have to continue raising rates, which he said will be “well above” 4% by the end of the year. There is a 95% chance that the Fed will raise rates by 75bp, according to the CME’s FedWatch, which would bring the benchmark rate to 4%.
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USD/CAD Technical
- 1.3854 and 1.4005 are the next resistance lines
- There is support at 1.3731 and 1.3580
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