The Canadian Dollar fell sharply against its American counterpart on Thursday. The USD/CAD exchange rate spiked to 1.3920, a six dollar high dating back to May 21. This shift comes in spite of a big June retail sales report, which widely reported a robust economy. At first, this increase had set expectations for the Loonie’s bullish tendencies. The underlying optimism is tempered by a reality that goes well beyond just how we’re doing economically at home, including the new global monetary policy landscape.
The USD/CAD pair has taken cup its fourth consecutive day of a profit. This winning streak is supported by pressures that overshadowed the encouraging Canadian retail sales numbers. According to the analysts’ consensus retail sales in Canada increased by 1.5% month-over-month in June, right on target, according to Statistics Canada. Sales excluding autos were up a huge 1.9%, well above the market expectation of 1.1%. These figures were a bright spot for the Canadian economy, suggesting that consumers are holding up.
Despite some optimistic retail sales data churning out for Canada, the Canadian Dollar crumbled. Statistics Canada released an advance estimate, forecasting a 0.8% decline in retail sales for July, which added further downside pressure to the currency. This forecast has cooled optimism about the June numbers and has played a role in making the Loonie the weakest currency on the market this morning.
While USD/CAD continues to float around the 1.3920 line, traders are keenly focused on looking at the larger economic picture. They are rightfully focused on central bank policies that drive currency valuations. International mood is fixed on what U.S. Federal Reserve will do next. These decisions will have lasting consequences for the Canadian and U.S. economies.
Some observers see the Canadian Dollar forward-looking weakness, constraining scope for immediate positive impact on the currency. This is a significant change in the markets’ view of possible future interest rate cuts from the Federal Reserve. Analysts are currently giving a roughly 70% chance to at least a 25 basis-point cut in September. This probability, which has dropped down from near-certainty just a week ago, is indicative of shifting expectations around what the Fed will do with its approach.
Boston Fed President Susan Collins highlighted this vagary in a recent speech. She stressed that any decision to raise or lower the cost of borrowing interest rates is “not a foregone conclusion.” She conceded that inflationary pressures are “broader and more persistent.” We should take this as a sign that the Fed will be more circumspect going forward.