Canadian Dollar Recovery Extends as Retail Sales Keep Pressure on Brexit-stricken GBP/CAD

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• GBP/CAD spot rate at time of writing: 1.7330
• Bank transfer rate (indicative guide): 1.6723-1.6845
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The Canadian Dollar extended its recovery on Friday and helped keep pressure on the Brexit-stricken Pound-to-Canadian Dollar exchange rate after Statistics Canada reported June retail sales that surpassed market expectations.

Canadian retail sales rose 23.7% in June to C$53.0 billion, undershooting the 24.7% anticipated by economists but building on a 21.2% May increase that was revised higher from the initial estimate of 18.7%.

Furthermore, the more important measure of core retail sales came in at +15.7% when markets were looking for just a 14.5% increase, with the estimate for May having gone unrevised at 10.6%.

Core sales tend to garner more attention because they ignore high value items like cars, which can obscure underlying trends, but the upgrade to May's number will not have gone unnoticed by investors for more than a moment. 

"Sales were up across the board, particularly at non-essential retailers, with clothing stores posting a gain of more than 140%," says Royce Mendes, an economist at CIBC Capital Markets. "Retail sales are now above their pre-pandemic level, but the pace of recovery is likely to slow ahead."

Above: USD/CAD rate shown at 15-minutes intervals alongside Pound-to-Canadian Dollar rate (black line, left axis).

All segments of the trade saw sales rally back from sharp declines although Statistics Canada warned of a July slowdown. 

It estimates that sales grew only 0.7% last month despite more provinces progressing further toward a full reopening.

If correct the estimate might vindicate economists who've forecast that a sharp rebound will be followed by much more muted growth into year-end.

Many had initially looked to see a so-called V-shaped recovery though lots now speculate that what could actually transpire is a GDP trajectory that more closely resembles a W when plotted on a chart. 

Friday's data comes after Canada's government extended emergency income support benefits for residents who've had incomes disrupted by the coronavirus and government efforts to contain it. 

Above: Canadian Dollar performance against major rivals this week. Source: Pound Sterling Live. 

"Our Government Credit team has noted that this may add some pressure to Canada’s AAA/AA+ ratings. We do not anticipate much price action in USD/CAD on these changes, at least in the short term. Longer term ramifications will depend on the total amount of fiscal stimulus Canada has put out relative to other economies," says Sarah Ying, a CIBC currency strategist. "There seems to be weak support at the 1.3150 area for USD/CAD." 

Canada's Dollar was quoted higher against all other than the U.S. Dollar, Yen and New Zealand Dollar on Friday but had gained over all except the Japanese currency for the week, which saw the USD/CAD-correlated Dollar Index break down to new lows as the Euro-to-Dollar rate edged up to new highs. 

GBP/CAD was down more than half a percent on Friday amid steep losses for Sterling against most major currencies as the British unit paid for Thursday's outperformance and a strong set of IHS Markit PMI surveys were overlooked in the wake of a downbeat update from Brexit negotiators. 

A terse statement from UK negotiator David Frost set out the cold reality for Sterling, as well as the economies on each side of the English Channel. He highlighted EU demands for continued control over vast areas of UK policy and for treaty rights to British natural resources that collectively, would make a mockery of 'Brexit'. The EU's comments can be found here.  

Above: USD/CAD rate shown at daily intervals alongside Pound-to-Canadian Dollar rate (black line, left axis).

"We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done. Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge," says Neil Wilson, chief market analyst at Markets.com. "The competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned."

The Pound-to-Canadian Dollar rate has risen from below 1.72 to near 1.77 in little more than a week during late July but has since unwound close to all of that gain in August, leaving it trading just above 1.7300 on Friday. 

Sterling's loss would have been worse if not for a 0.39% Friday increase in USD/CAD, which had otherwise traded lower throughout what has been a volatile week for major currencies. This volatility has been reflected in a 1.7280-to-1.74 Pound-to-Canadian Dollar rate range.

The rub for Sterling however, is that if markets are becoming concerned about the trajectory of the Brexit process again then it might not be long before GBP/CAD unwinds the rest of July's gains and then some. Sterling fell to 1.57 against the Loonie when Brexit last left a mark on it.

"The GBP looks to have found good support at 1.7245 via a bullish “morning star” signal on the daily candle chart but we think a move above 1.7375 (minor trend channel, possible bull flag) is needed to lift the cross from here," says Juan Manuel Herrera, a strategist at Scotiabank in a Tuesday research note. 

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