Canadian dollar steady ahead of retail sales

The Canadian dollar is showing limited movement on Thursday. In the European session, USD/CAD is trading at 1.4396, up 0.13% on the day. The Canadian dollar started the week with sharp gains of over 1% but has since given up about half of those gains.

Canada's retail sales are projected to have decelerated in November and that could be bad news for the Canadian dollar. Retail sales are expected to have eased to 0.2% m/m, down from 0.6% in October. Consumer spending has shown some robustness, with four straight months of strong gains, in response to interest rate cuts from the Bank of Canada. A major test for retail sales will be the November and December reports, which reflects consumer spending during the critical Christmas season.

The central bank has been aggressive in its easing cycle, chopping borrowing costs by 175 basis points since June 2024, including a 50-bp cut at the December meeting.  The cash rate of 3.25% is much lower than the Federal Reserve's rate of 4.25%-4.5% and the BoC will have to tread carefully. The Fed has sounded more hawkish lately and is not expected to cut more than one or two times due to the strong US economy. If the BoC is more aggressive than the Fed in lowering rates, it would widen the US/Canada rate differential and put further downward pressure on the weak Canadian dollar.

Another headache for the BoC is the Trump factor. The new US President has threatened to levy 25% tariffs on Canada as early as February 1. Ever the deal maker, Trump may be leveraging this threat to wring concession from Ottawa. Still, Trump's tariff threat has to be taken seriously as such a move would damage the weak Canadian economy, which is very dependent on the US.

• USD/CAD is putting pressure on resistance at 1.4412. Above, there is resistance line in 1.4447
• 1.4357 and 1.4322 are the next support levels