Canadian Dollar Lower After Weak Sales and Government Growth Downgrade

The USD/CAD is trading at 1.3330 after the release of the Canadian retail sales and inflation data. The consumer price index (CPI) was in line with expectations and the less volatile core CPI that excludes auto and energy was higher than expected at 0.3 percent. The retail sales report disappointed by missing the forecast with a 0.5 percent contraction in September. The market was anticipating a smaller contraction of 0.3 percent proving evidence to the fact that the Canadian economic recovery is losing momentum and most of the third quarter indicators point to a lower gross domestic product.

The loonie was lower versus the U.S. dollar and is on track to reach the lows last seen in the beginning of October. The USD rally lost steam when the Fed failed to raise interest rates at the end of September and the big buck started to depreciate. The loonie continued to climb until the October FOMC statement boosted the USD. The statement was followed by the release of the minutes from the October meeting which continue to send a strong signal that the Fed is ready to hike in December.

Canada’s recently appointed Finance Minister Bill Morneau delivered his first Fiscal update today. The Finance Department revelled the new Liberal government is facing a deteriorating economy that has turned the projected Conservative budget into a deficit in reality. This is all before the Liberals follow through in their promised stimulus to add a strong pace to the recovery.

The Finance Department comments are in line from those by the PBO on November 10 making sure to note that the data only took into account the Conservative budget and will have to be adjusted once the Liberal spending plans are outlined.

In Canada the office of the Parliamentary Budget Officer (PBO) published a report that warns the nation is due to post higher deficits as growth will continue to be moderate. The PBO provides third party analysis to the Canadian government and is sticking to its forecast of 2 percent growth in 2016 and 2.3 percent in 2017 as global activity and lower oil prices will continue to be a concern to the commodity exporter.

The Canadian budget watchdog made sure to comment that the warnings do not take into consideration the campaign promises of the newly elected Liberal government. The report made its forecasts on the existing plans from the ousted Conservative government led Stephen Harper. Newly elected Prime Minister Justin Trudeau campaigned on a platform of stimulus and infrastructure spending which could see the deficit balloon even further

The Liberal platform was built on fiscal stimulus and Mr. Morneau has reiterated that it is the only way that Canada will achieve faster growth. The Canadian economy is still under the effects of lower oil prices, while the loonie drop has not been able to boost exports to the point where it can offset the losses in the energy sector.

Next week will have less trading activity than usual as there is very little on the economic calendar with Japan and the U.S. have holidays that will reduce liquidity in the markets. There are no major releases expected in Canada, and with lower liquidity the loonie could be exposed if there are any unscheduled events that could shock the market during the week. The next big event in the horizon for the Canadian dollar is the U.S. non farm payrolls and Canadian employment data to be released on December 4.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza