Canadian Dollar declines after lower-than-expected Retail Sales 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.

Bank of Canada FAQs

What is the Bank of Canada and how does it influence the Canadian Dollar?

The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.

What is Quantitative Easing (QE) and how does it affect the Canadian Dollar?

In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.

What is Quantitative tightening (QT) and how does it affect the Canadian Dollar?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.

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