Canadian dollar down despite solid Retail Sales

The Canadian dollar is coming off a rough week, as USD/CAD climbed 1.70%. In today’s European session, USD/CAD is trading at the 1.30 line.

Canadian retail sales beats estimate

Canadian retail sales jumped 1.1% in June, which was much stronger than the 0.3% forecast. Still, this was lower than the May reading of 2.3%. Core retail sales dropped to 0.8%, just shy of the 0.9% estimate and below the May release of 1.9%. Consumers are feeling the pain from high inflation and rising interest rates and are cutting back on spending. The downtrend is expected to continue, with Stats Canada forecasting a -0.2% reading for headline retail sales in July.

The Bank of Canada continues to play catch up with inflation and delivered a mega-hike of 100 basis points in July. Inflation slowed to 7.6% in July, down from 8.1% in June. However, the Bank’s preferred inflation indicator for core inflation rose to 5.5% in July, up from 5.3% in June. It’s too early to tell if inflation has peaked, but the steep rate-tightening cycle has slowed growth. The BoC has slashed its growth forecast for 2022 to 3.5%, down from a previous estimate of 4.2%, stating this was due to the impact of high inflation and tighter conditions on consumption and household spending. The BoC meets on September 7th and is expected to raise rates by 50 basis points.

Federal Reserve Chair Powell will host a central banking conference in Jackson Hole this week. It will be another opportunity for the Fed to reiterate its message that inflation is far from being beaten and it has no plans to stop raising rates even if growth has slowed. The markets jumped on the drop in inflation in July, and speculation rose that the Fed might U-turn on its aggressive policy. I expect Powell to engage in some “push-back” and try to convince the market that the Fed is committed to taming inflation and will continue to raise rates to achieve this goal.

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