The Canadian dollar weakened on Friday by the most in nine months against the US dollar after indicators of inflation and consumer activity in Canada fell below market expectations. The “loonie” fell as investors adjusted their portfolios to reflect a lower probability of the Bank of Canada raising interest rates at its October 25th meeting.
Statistics Canada said on Friday that retail sales in August fell 0.3% to C$48.9 billion and that sales had fallen in eight of eleven sectors. Ahead of the data’s release, economists had estimated sales growth of 0.5%.
On inflation, Statistics Canada said that the consumer price index rose 0.2% in September, below an expectation for 0.3%, and that annualized price growth was now 1.6%, ahead of August’s reading of 1.4% but comfortably below the Bank of Canada’s 2% target.
In the hours following the data, USD/CAD climbed more than 1% to 1.2621. The foray above 1.26 was the pair’s first since August. The Canadian dollar has now weakened against its American counterpart in five of the past six weeks. USD/CAD began the week at 1.2473.
CAD weakness also forced EUR/CAD above 1.485 for the first time in seven weeks. The rate gained 0.5% on the day to 1.4877 and settled well above Monday’s open of 1.473.
Future Bank of Canada policy remains the dominant driver of the loonie’s valuation and as the week ended derivatives markets were pricing in only a 19% probability of the bank raising its overnight interest rate on Wednesday from its current level of 1.0%. The implied probability of an increase had been well above 30% earlier in the month.
Further to disappointing economic data, in recent weeks difficult trade talks with the US and Mexico regarding “NAFTA 2.0” have weighed on Canada’s currency, which has struggled to appreciate even as commodities prices – ordinarily a factor in CAD valuation – have risen.
The Canadian dollar has nonetheless strengthened by more than 6% against the US dollar since June. The loonie surged in the summer months amid speculation that the Bank of Canada would become one of only two major central banks (together with the US Federal Reserve) to enter a policy tightening cycle. In July, the bank didn’t disappoint investors when it raised interest rates for the first time in seven years. The bank raised again in September.
In light of the Japanese election which takes place on Sunday, FX traders be aware that CAD/JPY may begin next week with an opening gap. In the election, incumbent Prime Minister Shinzo Abe is expected to defeat current Tokyo governor Yuriko Koike and if that is the case there will likely be minimal reaction in CAD/JPY rates. However, a Koike victory might induce a sharp fall in CAD/JPY because this would be perceived as leading to a quicker end to the Bank of Japan’s massive bond-buying program.