The Canadian dollar is trading higher on Friday, showing positive momentum in the European session. As of now, USD/CAD is at 1.4342, marking a 0.30% gain for the loonie. While no major Canadian economic events are scheduled today, market participants are eyeing the release of U.S. manufacturing and services PMI data.
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Canada’s Retail Sales Surge by 1.6% in December
The Canadian dollar received a boost following an impressive retail sales report. According to the advance estimate for December, retail sales climbed by 1.6% month-over-month (m/m), the strongest monthly increase since January 2023. This notable jump in consumer spending can be attributed to two key factors:
- Bank of Canada’s Aggressive Rate Cuts: The central bank’s aggressive monetary easing has positively influenced consumer sentiment, leading to increased spending. Inflation has also slowed, creating a more favorable environment for consumers.
- Federal Sales Tax Holiday: A federal sales tax holiday introduced in mid-December has contributed to the surge in retail sales. This temporary measure, running through February, incentivized shoppers to make purchases, significantly boosting December’s retail activity. This trend is expected to reflect positively in fourth-quarter retail sales figures. However, the Bank of Canada noted that this tax holiday may have caused a short-term uptick in inflation.
In contrast, retail sales for November remained flat at 0%, falling short of the market expectation of a 0.2% increase. The December numbers underscore a significant rebound in consumer activity.
Bank of Canada’s Easing Strategy and USD/CAD Impact
The Bank of Canada has pursued an aggressive easing cycle, reducing borrowing costs by 175 basis points since June 2024. This includes two consecutive 50-basis-point rate cuts in October and December. Currently, the cash rate stands at 3.25%, substantially lower than the Federal Reserve’s rate range of 4.25%-4.50%.
The divergence in monetary policy between the Bank of Canada and the Federal Reserve will be a crucial factor for USD/CAD in 2025. While the Fed is expected to implement only one or two rate cuts this year, the Bank of Canada’s more aggressive stance could further widen the rate differential, potentially weakening the Canadian dollar.
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USD/CAD Technical Analysis
- Support Levels: USD/CAD has dropped below the support level of 1.4378 and is currently testing the next support at 1.4341.
- Resistance Levels: The pair faces resistance at 1.4421 and 1.4458.
Key Takeaway
The Canadian dollar’s recent strength highlights the impact of strong domestic retail sales and the Bank of Canada’s monetary policy. However, its trajectory in 2025 will largely depend on how the Bank of Canada’s actions align with or diverge from the Federal Reserve’s approach.
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