Canadian Dollar eases against US Dollar after weak Retail Sales and mixed US PMI data
- USD/CAD snaps a four-day losing streak, steadies above 1.3600 on Thursday
- Canada’s May Retail Sales fall 1.1% MoM, in line with forecasts; Core Retail Sales down 0.2%.
- US flash Composite PMI jumps to 54.6 in July, Services PMI beats at 55.2; Manufacturing slips into contraction.
The Canadian Dollar (CAD) loses against the US Dollar (USD) on Wednesday as the Greenback finds its footing after a volatile start to the week. The US Dollar is drawing mild support from stabilizing Treasury yields and improving global risk sentiment, with optimism around a potential US-EU trade deal helping ease investor jitters.
The USD/CAD pair inches modestly higher on Wednesday, snapping a four-day losing streak as buyers step back in near the 1.3600 psychological level. At the time of writing, the pair is trading around 1.3620 during the American session, up about 0.15% on the day.
The Loonie’s pullback comes after Canadian Retail sales fell by -1.1% in May, matching market expectations but marking a sharp reversal from April’s 0.3% rise. Meanwhile, Core Retail Sales excluding autos dropped 0.2%, a slight improvement over the expected -0.3% print, although still indicating softening consumer demand.
In the United States, preliminary S&P Global Purchasing Managers Index (PMI) data for July offered a mixed view of economic momentum. The flash Composite PMI rose to 54.6, up from 52.9 in June, signaling the fastest pace of overall business activity in seven months. The Services PMI jumped to 55.2, beating expectations of 53.0 and reflecting solid demand in the services sector. However, the Manufacturing PMI dropped to 49.5, down from a prior reading of 52.0 and below the forecast of 52.5, slipping into contraction territory.
Separately, US Initial Jobless Claims fell to 217,000 in the week ending July 19, down from 221,000 and better than the expected 227,000, marking the lowest reading since mid-April. The data reflects continued resilience in the labor market, even as broader market sentiment keeps the Greenback under modest pressure. Continuing Claims, which reflect those still receiving benefits, rose slightly to 1.955 million, pointing to a gradual cooling in re-employment.
Despite signs of economic strength, the data failed to lift the US Dollar. The US Dollar Index (DXY), which tracks the Greenback against a basket of major peers, is edging lower and was last seen around 97.17 after holding firm earlier in the day. Lingering concerns over ongoing tariff uncertainty and Federal Reserve's (Fed) independence continue to weigh on sentiment.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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