Canadian Dollar weakens after Retail Sales show slowdown in May

Canadian Dollar declines versus the US Dollar on Friday after Canadian Retail Sales come out lower than expected in May. 
The USD also benefits from JPY outflows ahead of the BoJ meeting next week.
The Greenback is supported by strong Initial Jobless Claims data on Thursday, which showed a sharp fall in new unemployment claimants. 
Technically the pair is trading in a range above a thick band of support in the upper 1.30s. 

The Canadian Dollar (CAD) weakens against the US Dollar (USD) on Friday, after official data shows Canadian shoppers tightened their belts in May. Canadian Retail Sales rose 0.2% compared to the 0.5% forecast from 1.0% in the previous month, data from Statistics Canada showed. 

The US Dollar also benefits from outflows from the Japanese Yen as traders shed their JPY holdings in favor of the Buck ahead of the Bank of Japan policy meeting next week, at which the board of governors is seen as likely to maintain the current ultra-loose policy. 

The USD/CAD pair trades in the 1.31s during the US session.  

Canadian Dollar news and market movers 

The Canadian Dollar loses ground against the US Dollar after the release of Canadian Retail Sales on Friday, which comes out lower-than-expected, printing 0.2% in May versus the 0.5% forecast from 1.0% in the previous month of April. 
Retail Sales ex Autos also falls below expectations, printing a 0.0% change in May versus the 0.3% expected and the 1.2% rise registered in April.  
Canadian New Housing Price Index data, released at the same time, registers a 0.1% rise in June, which was higher than the 0.0% forecast but the same as the 0.1% previous. 
The lower-than-expected Retail Sales data weighs on the CAD (USD/CAD rises) because it indicates consumer spending is falling which will probably lead to lower inflation and lower interest rates – a negative for the Canadian Dollar. 
The Greenback benefits from outflows from the Japanese Yen (JPY), according to a report by Reuters, cited by FXStreet Lead Analyst, Eren Sengezer. Traders are dropping the Yen ahead of next week’s Bank of Japan (BoJ) policy meeting amidst expectations the BoJ will maintain its Yield Curve Control (YCC) at current levels when some tightening had been expected previously amid higher inflation. 
The US Dollar is further supported by lower-than-forecast US Initial Jobless Claims data for the week ending July 14. First-time applications for unemployment benefits in the US declined to 228,000, the Department of Labor announced on Thursday. This was well below the market expectation of 242,000. The strong jobs data suggests more persistent inflationary pressures ahead, which should keep interest rates higher for longer – a positive for the Buck. 

Canadian Dollar Technical Analysis: Treading water near critical support level

USD/CAD is probably in a long-term uptrend on the weekly chart, which began at the 2021 lows. Since October 2022, the exchange rate has been in a sideways consolidation within that uptrend. Given the old saying that ‘the trend is your friend’, however, the probabilities favor an eventual continuation higher and longs over shorts.

USD/CAD appears to have completed a large measured move price pattern that began forming at the March highs. This pattern resembles a 3-wave ABC correction, in which the first and third waves are of a similar length (labeled waves A and C on the chart below). 

US Dollar vs Canadian Dollar: Weekly Chart

A confluence of support situated in the upper 1.3000s, which is made up of several longer moving averages and a major trendline, prevented last week’s decline from extending any lower and provided a foundation for the reversal on Friday and Monday.  

US Dollar vs Canadian Dollar: Daily Chart

The long green up-bar that formed on Friday is a bullish engulfing Japanese candlestick reversal pattern. When combined with the long red down bar that formed immediately before it, the two together also complete a two-bar bullish reversal pattern. 

The Relative Strength Index (RSI) is converging bullishly with price at the July lows when compared to the June 27 lows. At the June 27 lows, RSI was lower than in July despite price being higher. This suggests underlying strength and is a bullish sign. 

Monday’s weak close, however, failed to provide confirmation for the reversal, and since then, the price has been pulling back down. 

It will take a decisive break above the 50-day Simple Moving Average (SMA) at circa 1.3400 to refresh and reconfirm the USD/CAD long-term uptrend. Nevertheless, bulls marginally have the upper hand, with the odds slightly favoring a recovery and a continuation higher. 

Alternatively, a decisive break below 1.3050 would indicate the thick band of weighty support in the upper 1.30s has been definitively broken, bringing the uptrend into doubt. 

Canadian Dollar FAQs

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

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