USD/CAD – Loonie Bears Bullied Despite Disappointing Sales Report

• Canada Retail Sales doubles down from expectations
• Oil and Gold provides CAD bulls temporary relief
• BoC’s Poloz credibility on the line

The Canadian dollar is closing out the week strengthening against the dollar (CAD$1.2605), shrugging off a brief spat of weakness after a disappointing January retail sales print (-1.7% vs. an expected -0.8% print) and inflation data. Most of the weakness came from the sales report as both yearly all-items inflation and yearly core for February hit estimates (+1% and +2.1%).

Trading the currency pair has been rather choppy of late, mostly within established ranges. Support for the loonie from its weakest point after this morning’s data (CAD$1.2725) is coming from a move higher in crude oil prices ($47.02 +3.2%) and gains in other commodities (gold +1% to $1,1182).

BoC Provides the Event Risk

Excluding commodities, the short-term directional play of the CAD remains at the mercy of the BoC. Next week Governor Poloz and Deputy Governor Lane both deliver speeches. The most important will be the Governor’s speech next Thursday March 26. He is due to speak at the Canada-UK Chamber of Commerce, in London at 09:30 am EST. Text of the speech is due to be released 15 minutes earlier than the speaking time listed. Poloz will hold a press conference 75 minutes after the speech.

Investors and dealers alike will try to gauge how the Central Bank might be balancing slow growth with the surprising strength on inflation (core remains above +2% at +2.1%). The Governor’s credibility is very much on the line. Especially after he used some very-dovish language to support his surprise decision to cut rates in January and then followed it up this month doing an about turn holding rates steady with some optimistic comments. It was his ‘one-and done’ oil insurance cut.

The OIS (Overnight Index swaps) is pricing in another rate cut from the BoC in the coming months. Will the Governor be willing to support the markets expectation next week? For now, the market remains a better buyer of U.S dollar on dips. So long as the USD/CAD support at $1.2535 remains intact over the short term, the more confident the USD bulls will be in taking on the psychological $1.2800 level once again.

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