Canadian dollar eyes retail sales

The Canadian dollar is showing small losses on Friday. USD/CAD is trading at 1.4196 in the European session, up 0.14%. On Thursday, the Canadian dollar took advantage of broad US dollar weakness and gained 0.45%.

Will the week end on a high note?  Canada releases retail sales for December 2024 later today and the market estimate stands at 1.6% m/m.  This would mark a sparkling rebound from the flat reading in November, which was marked by lower food sales.

Retail sales have been accelerating in the second half of 2024 and the trend is expected to continue into this year.  The potential headwind to consumer spending is the Trump administration's threat to impose tariffs on Canadian products. With around 75% of Canadian exports heading to its southern neighbor, a trade war with the US would cause significant damage to Canada's economy and Ottawa will be pulling out all the stops to placate President Donald Trump and avoid tariffs.

US tariffs would boost global inflation, which threatens to und0 the progress the major central banks have made to contain inflation.  The Federal Reserve has pointed to tariffs as an upside risk to inflation and Bank of Canada Governor Tiff Macklem has acknowledged that the tariffs are causing uncertainty.  The US has suspended tariffs aimed at Canada until March 3 and whether the tariffs are reinstated or not could impact the BoC's decision at its meeting on March 12.

The US wraps up the week with manufacturing and services PMIs for February.  Manufacturing PMI is expected to improve to 51.5 from 51.2, which would point to weak expansion.  The services sector is slightly stronger, with a market estimate of 53.0, compared to 52.9 in January.

• USD/CAD is testing resistance at 141.96. The next resistance line is 142.25
• There is support at 141.47 and 141.18