The Canadian dollar continues to rally and gained more than 1% this week. We will see Canadian retail sales later today.
Retail sales are expected to rebound
After a difficult start to the week, the Canadian dollar pulled back and posted three winning days, while the US dollar fell against the major currencies. The war in Ukraine undermined risk appetite, which weighed on the Canadian dollar. However, this has been largely mitigated by soaring oil and other commodity prices, as Canada is a major commodity exporter.
The Canadian currency’s appreciation could well continue on Friday if January’s retail sales perform as expected. The overall and core readings are expected to climb 2.4% MoM. In December, retail sales fell -1.8% and core retail sales fell -2.5% as holiday shopping was hampered by the Omicron virus.
The Federal Reserve has finally pressed the take-off button for a rate-tightening cycle, and the Bank of Canada is expected to follow suit. Both central banks are under pressure to dampen runaway inflation, which has reached 40-year highs in Canada and the United States. Markets have priced in up to six more hikes this year as the Bank of Canada will need to be aggressive in bringing inflation back to its target range of 1-3%. The dilemma for Bank policymakers is that inflation is not fueled by economic growth, and fears of stagflation mean the BoC will have to be cautious to avoid stifling growth due to sharp hikes in interest rates. ‘interest.
With the FOMC meeting over, markets are refocused on the war raging in Ukraine. Russia continues its onslaught even during the talks, but the markets are hoping that this time the talks will lead to a breakthrough that will end the fighting. These hopes have already been dashed, but the optimism has revived risk appetite and pushed the US dollar lower. Any sign of progress in the talks will likely extend the decline of the US Dollar.
- USD/CAD faces resistance at 1.2653 and 1.2777
- There is support at 1.2562 and 1.2438
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