**USD/CAD Strengthens Toward 1.3650 as Canadian Retail Sales Disappoint: Economic Overview and Market Analysis**
*By Sagar Dua, originally published on FXStreet*
The USD/CAD currency pair has been gaining bullish momentum, moving toward the 1.3650 level, as weaker-than-expected Canadian retail sales data triggers concerns over the nation’s economic resilience. This aligns with broader market sentiment favoring the US dollar, which has been supported by higher Treasury yields and a cautiously optimistic outlook on the US economy.
In this in-depth analysis, we explore the economic rationale behind the strengthening of the US dollar against the Canadian dollar, delve into the implications of recent Canadian retail data, and evaluate how the broader macroeconomic landscape is shaping forex price action.
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## Canadian Retail Sales Data Misses Expectations
Canadian retail sales figures for May have disappointed market expectations, suggesting that consumer spending in Canada is sharply cooling amid high interest rates and persistent economic uncertainty. According to Statistics Canada:
– **Headline retail sales declined by 0.5% MoM**, worse than the market forecast of a 0.0% change.
– Core retail sales, which exclude gasoline and motor vehicle and parts dealers, also declined by 0.3%.
– This marked the **second consecutive decline**, amplifying concerns that high borrowing costs are weighing on Canadian households and curbing discretionary spending.
The reduction in retail sales reflects softer domestic demand and a potential deceleration in economic activity. With the Canadian economy showing modest signs of weakness, investors are becoming increasingly skeptical of further monetary tightening by the Bank of Canada (BoC).
### Key Highlights from the Retail Sales Report:
– Furniture stores, clothing retailers, and general merchandise were among the sectors that reported lower sales.
– An increase in sales at food and beverage outlets and gasoline stations provided a modest offset to otherwise widespread weakness.
– The retail control group, a closely watched metric by economists and analysts, fell by 0.4%, mirroring broader consumer pessimism.
This underwhelming data has added pressure on the Canadian dollar, signaling limited consumer engagement in the second quarter. Analysts now expect real GDP growth in Q2 2024 to be considerably softer than previously anticipated.
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## Bank of Canada Holds, But Market Eyes More Easing
The BoC, having initiated a 25-basis-point rate cut in June 2024 (bringing the policy rate to 4.75%), has taken a more dovish stance compared to its earlier hawkish posture. The bank cited a cooling labor market, slowing inflation, and declining consumption as rationale for its pivot.
Recent data, particularly the weak retail sales, reinforce this dovish trajectory and suggest that the central bank might continue easing through the rest of the year. Many investors are now evaluating the following:
– **Odds of another rate cut in September** appear to have increased.
– The **Canadian 10-year bond yield has continued to drift lower**, reflecting lower inflation expectations and subdued growth particularly in the services and retail sectors.
– Futures markets are now pricing in nearly **50 basis points of cumulative cuts by the end of 2024**.
In contrast, the US Federal Reserve remains more data-dependent and cautious despite softening inflation.
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## US Dollar Bolstered by Yield Advantage and Fed Caution
The US dollar continues to find strength in global FX markets, particularly as interest rate differentials tilt in favor of the greenback. In the case of USD/CAD:
– The **US 10-year Treasury yield remains elevated** around 4.25 to 4.30%, reinforcing the dollar’s carry advantage over the loonie.
– Fed Chair Jerome Powell has acknowledged cooling inflation, but the Fed has reiterated it is not yet ready to cut rates prematurely.
The June Core Personal Consumption Expenditure (PCE) Price Index — the Fed’s preferred inflation metric — has been well-contained, but not low enough to trigger an immediate cut. This has allowed the greenback to retain its
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