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Canadian Dollar Supported by Retail Recovery but the BoC Could Weigh Next Week

Image © Bank of Canada

- CAD supported in G10's top spot by Feb retail sales data.

- But CIBC says data doesn't change the soured BoC outlook.

- TD Securities warns of BoC shift into neutral mode next week.

The Canadian Dollar was among the top G10 performers Thursday after February retail sales numbers surprised on the upside but analyst commentary ahead of the Easter weekend suggests Bank of Canada (BoC) rhetoric could weigh on the Lonnie next week. 

Retail sales rose by 0.8% to $50.8 bn in February, more than reversing a downwardly-revised -0.4% contraction from January, when consensus had been for only a 0.4% gain. 

Core retail sales, which exclude car purchases because of their distorting impact on underlying trends, rose by 0.6% when markets had been looking for only a 0.2% gain. That reversed the revised -0.6% contraction seen in the previous month. 

"Retail sales posted a healthy advance in February, but that’s where the good news ended. The prior month’s data were revised lower, and sales in real terms turned out to show a much more modest advance. As a result, the overall picture on consumption remains largely the same, with households facing a challenging environment as rates have risen," says Royce Mendes, an economist at CIBC Capital Markets.

Markets care about retail sales figures because they reflect rising and falling demand within an economy, which is key to the outlook for the consumer price pressures that central banks are attempting to manipulate when they tinker with interest rates. 

Growth indicators are of increased importance to the Loonie at the moment because the economy slowed late last year amid a broad and global deceleration, which forced the Bank of Canada to move gradually to the sidelines of the interest rate field between December and January. 

"The decline in manufacturing coupled with the only moderate gain in retail sales volumes suggests that GDP growth is set to cool off after the blowout pace seen in January. As a result, it still appears that Q1 will post a sub 1 ½% advance in Canada, making it two consecutive quarters where growth has undershot potential," Mendes adds. "Possible opening of an output gap will leave the Bank of Canada communicating a stand-pat outlook for monetary policy next week." 

Above: Pound-to-Canadian-Dollar rate shown at 4-hour intervals.

The Pound-to-Canadian-Dollar rate was -0.08% lower at 1.7392 during the noon session Thursday and is now down -0.04% for 2019 after Sterling was knocked off its perch as the G10 world's best performing currency earlier this week.

"Weekly (“evening star”) and monthly (“shooting star”) price signals turned bearish at the end of last month, implying strong resistance at 1.7790/00 and longer run downside risks. We think potential losses may be limited to the 1.70 area now—rather than the 1.65/1.66 zone—but the pound will need to make new cycle highs (sooner, rather than later) to overcome these negatives," says Eric Theoret, a technical strategist at Scotiabank

The USD/CAD rate was 0.19% higher at 1.3375 Thursday but has fallen -1.64% in 2019. Canada's Dollar is currently the best performing currency in the G10 basket for 2019, due mainly to a rebound in oil prices that has repaired much of December 2018's BoC-related loss.

"Momentum indicators are neutral. The range from early March has yet to be broken and the sequence of higher lows and lower highs offers a triangle with support at 1.3280 and resistance in the lower 1.34s," Theoret adds.

 

Above: USD/CAD rate shown at daily intervals.

The BoC will announce its latest interest rate decision on Wednesday 24 April. Economists are now speculating that it will sit on hold for at least the foreseeable future. In March, the BoC stopped just short of saying it doesn't expect to raise rates at all this year. 

Not so long ago, in October, BoC officials had suggested the bank could lift its cash rate on as many as three occasions in 2019 and potentially taking it from the current 1.75%, up to 2.5%. But now markets are flirting with the idea of pricing-in a cut to the official cash rate before year-end. 

Interest rate decisions are normally only made in relation to the outlook for inflation but impact currencies because of the push and pull influence they have over capital flows and due to the opportunity they provide short-term speculators. 

"The softer outlook for GDP certainly implies a more cautious approach than in January – the only question is whether the March statement went far enough to reflect the realities facing the BoC," says Andrew Kelvin, a strategist at TD Securities.

Many of the indicators contained in the BoC's latest business outlook survey fell to their lowest levels since the third quarter of 2016. The survey vindicates the Bank of Canada for not having raised its interest rate thus far in 2019.

The sales growth indicator pointed clearly in the first quarter toward the weakest revenue growth for companies since the July-October period of 2016, while investment and hiring intentions both fell too, albeit that the latter still remain at elevated levels.

"Given the broad disappointment on growth in 2018Q4 we don't see a likely path back to full employment for the BoC this cycle. It would therefore be appropriate for the Bank to signal that they have no firm conviction on the direction of the next move in the overnight rate," says TD's Kelvin. 

Financial markets are already close to betting on BoC rate cuts before year-end, given the BoC and most other central banks have signalled they do not expect to raise rates any time soon.

Pricing in the overnight-index-swap market implied a December 04, 2019 Canadian cash rate of 1.69% on Friday, around 6 basis points below the current 1.75% cash rate. This is investors betting against the BoC.

Those bets could become larger, and harder for the Canadian Dollar to carry, if the BoC does go ahead and warn that the next move in rates could be either up or down. That would be tantamount to abandoning its current 'tightening bias' and shifting into neutral mode. 

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