More Downside Ahead for Canadian Dollar on CPI Inflation and Retail Sales Miss

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This morning, Canada's retail sales and inflation data were due. Retail sales are expected at 0.0% for April, down from the 0.6% gain in March. Retail sales ex-autos were forecast to rise 0.5% after a 0.2% decline in March.

May inflation will be boosted by higher gas prices and rise to 2.5%, y/y compared to the 2.2% increase in April. However, the Core Consumer Price Index is forecast at 1.4%, y/y down from the 1.5% level in April.

If the reports are stronger than expected, USD/CAD will sink, but the drop will be shallow due to the negative Canadian dollar sentiment and bullish technicals. Weaker than expected data will extend gains to $1.3370.

The CPI data came in at 2.2% vs. 2.6% forecast and the Canadian dollar is under pressure. Retail sales was at -1.2% vs. 0.0%. Weaker CPI and retail sales is driving lower Bank of Canada rate hike expectations. The Canadian dollar is also suffering from ongoing NAFTA negotiations.

The Canadian dollar had a lousy week. In fact, it has had a lousy year. The loonie has lost 8.8% of its value against the American dollar since February and has the dubious distinction of being the worst performing major G-10 currency against the U.S. dollar in that time.

It wasn’t a good week for Canadian dollar bulls. The Canadian dollar lost 0.87% since the 6:00 a.m. opening level in Toronto, on Monday.

From peak to trough, the Canadian dollar declined 1.3%, USD/CAD rose from a low of $1.3160 on Monday morning to $1.3332, yesterday.

Canadian dollar selling pressure came on the back of GBP/CAD and EUR/CAD demand after the Bank of England Monetary Policy Committee took a surprisingly hawkish twist. Three MPC members including Chief Economist Andy Haldane dissented from leaving U.K. rates unchanged. Suddenly, a BoE rate hike in the near future (perhaps, August) became feasible again. That led to a bout of profit taking from traders holding short EUR/CAD and GBP/CAD positions.

Global trade war fears also undermined the Canadian dollar. The European Union, India and China have responded to US tariff increases. Prime Minister Justin Trudeau’s post G-7 grandstanding at President Trump’s expense elevated U.S./Canada trade tensions and increased fears that the North American Free Trade Agreement would be scrapped.

Federal Reserve Chair Jerome Powell reiterated his comments that U.S. rates need to rise, gradually. Meanwhile, the renewed trade drama may have clouded the BoC’s crystal ball on the outlook for the domestic economy, which reduces the chances for a Canadian rate hike in July.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians.