Canada made headlines this week with the release of its latest inflation and retail sales data. The inflation figures were particularly noteworthy, with both the headline (which includes volatile commodities like food and energy) and core coming in below estimates at 5.9% (YoY) and 5% (YoY), respectively. The lower-than-expected core number supports the Bank of Canada’s decision to pause their rate hike cycle in order to evaluate the cumulative impact of previous moves on the economy. This decision contrasts with the direction of their counterparts south of the border, where at least two additional rate hikes are expected. As a result, the Canadian dollar is expected to continue trending down in the short term.
Retail sales also showed strong growth, exceeding expectations of 0.2% with a 0.5% increase. This growth can largely be attributed to a surge in auto sales and merchandise store increases. A combination of factors, including a stronger US dollar, declining Canadian inflation, and lower oil prices, helped the USD/CAD break out of its previous 1.3300-1.3500 range, reaching a high of 1.3580 during the past week.
Looking ahead, the focus will be on Canadian growth data, with Q4 growth expected to decline from 2.9% to 2.1% on an annualized basis. This is likely to affect the Loonie’s performance.