The USD/CAD pair jumped to the 1.3750 range on Friday after the release of weaker-than-expected Canadian Retail Sales numbers, a barometer of the state of the Canadian consumer. This contrasts with the better-than-expected retail sales report from the US Commerce Department on Tuesday, once again stoking fears about the potential of widening interest rate differentials between Canada and the US.
The Canadian dollar slipped to a two-week low against the US dollar on Tuesday as investors reacted to diverging economic data from Canada and the US. On the Canadian side, Statistics Canada released the latest annual inflation rate, which came in at 2.7 percent compared to the expected 2.8 percent. South of the border, US data showed stronger-than-expected retail sales numbers, suggesting that the US consumer is adjusting well to the high-interest-rate environment.
The Canadian dollar touched a three-month high (USD/CAD low) on Thursday after lower-than-expected CPI inflation numbers were reported in the US on Wednesday. However, the Canadian dollar’s momentum quickly dissipated. This appears to be more a case of broad US Dollar weakness rather than Canadian dollar strength, as the broader USD index has lost 1.6% to date in June. The weakening US dollar is a result of increased expectations that the FED will begin its rate-cutting cycle in September, with the market pricing in approximately a 90 percent chance that the FED will cut rates in September (up from about 70% on Wednesday). This view was further reinforced by Chicago FED President Austan Goolsbee, whose dovish comments on Thursday indicated that, in his opinion, the US economy is on track to reach 2% inflation. These are some of the first signals from policymakers that a rate cut is coming.
As the expression goes, “when the US sneezes, Canada catches a cold.” Well, when US inflation cools substantially, the Canadian dollar gains. This morning’s US consumer price index (CPI), a measure of goods and services costs across the economy, fell year-over-year to 3%. This is a more rapid cooling than the 3.1% economists had expected.
