- The Canadian Dollar strengthens despite weaker July Retail Sales, with USD/CAD easing after failing to hold above the 1.3800 mark.
- Canadian household spending weakened in July as Retail Sales slipped 0.8%, while ex-autos sales dropped 1.2%.
- The US Dollar Index holds near six-day highs underpinned by resilient demand following the Fed’s cautious guidance.
The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday, with USD/CAD snapping a two-day winning streak and trimming earlier intraday losses despite a firmer Greenback and softer Retail Sales data.
At the time of writing, the pair is trading around 1.3778, easing from the day’s high of 1.3825, as bulls failed to sustain momentum above the 1.3800 psychological mark. Meanwhile, the US Dollar Index (DXY), which measures the Greenback’s value against a basket of six major currencies, is holding on to its post-Fed rebound, trading near six-day highs around 97.63.
Statistics Canada reported that Retail Sales fell 0.8% MoM in July, in line with expectations, after June was revised up to 1.6% from 1.5%. Ex-Autos Sales declined 1.2%, a sharper drop than the anticipated -0.7%, though the prior month was revised higher to 2.2% from 1.9%. The figures highlight softening domestic demand, raising concerns about consumer spending momentum after a robust second quarter.
The release comes on the heels of this week’s key central bank decisions. The Bank of Canada (BoC) lowered its policy rate by 25 bps to 2.50%. Policymakers cited slowing growth, weaker exports, and labor market cracks as justifications for easing. Governor Tiff Macklem emphasized the Bank is prepared to ease further “if risks rise.” Overnight index swaps imply about a 40% chance of another cut at the October 29 meeting, rising to nearly 75% by December.
The Federal Reserve (Fed) also cut rates by 25 basis points to a target range of 4.00%-4.25%, citing rising risks to the labor market while keeping a cautious stance on inflation. According to the CME FedWatch Tool, markets are assigning a 91% probability of a 25 bps cut in October and nearly an 80% chance of another move in December. This aligns with the Fed’s updated dot plot, which signaled around 50 bps of additional easing in the remainder of the year, though Fed Chair Powell stressed monetary policy would remain data-dependent.
In short, both central banks are easing, but the Fed is proceeding cautiously, while the BoC appears more flexible and openly dovish, given inflation is closer to target in Canada than in the US.
Bank of Canada FAQs
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.
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.
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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