December retail sales will be watched out of Canada on Friday at 13:30 GMT for clues on the prospect of rate increases by the Bank of Canada in 2019. As the Canadian economy loses some steam, the BoC has been forced to sit on the sidelines, dashing the odds of any rate hike in the coming months. The Canadian dollar, meanwhile, is enjoying newfound support from higher oil prices, though doubts about the global growth outlook and trade uncertainty are holding the loonie back.
Recent data out of Canada have been somewhat mixed. Inflation in December was unexpectedly strong, and employment rose sharply in January. However, manufacturing sales recorded a shock slump in December, while the recent oil production and investment cuts in Alberta are likely to weigh on first quarter GDP growth. The Bank of Canada has been quick to acknowledge the weakening economic backdrop, signalling that further rate hikes are not on the cards unless the data improves.
That improvement, however, is not expected to come from Friday’s retail sales figures. Retail sales are forecast to have dropped by 0.3% between and November and December, adding to the prior period’s 0.9% decline. Excluding autos, retail sales are also anticipated to have fallen by 0.3% over the month.
The loonie could pare some of its recent gains versus its US counterpart if the data confirms the weakening consumption picture in Canada. Dollar/loonie could jump back above the 50% Fibonacci retracement of the upleg from 1.2778 to 1.3664, at 1.3221. A climb above the 50% Fibonacci would risk shifting the current bullish bias for the loonie to a neutral-to-bearish one. It would also turn the focus on the 38.2% Fibonacci at 1.3326, which is near the 50-day moving average (MA).
But should the retail sales numbers surprise to the upside, dollar/loonie could extend its recent losses to fresh two-week lows and cross below the 200-day MA at 1.3150. A break below the 200-day MA could set the path towards February’s three-month trough of 1.3064.
With the BoC looking increasingly likely to remain on hold for at least the next few meetings, the local dollar has been benefiting from a rebound in the price of oil – Canada’s biggest export. Movements in oil prices, as well as overall market sentiment, will probably continue to be the main driver of the loonie until investors begin to wager higher chances of a rate hike in 2019. At the moment though, there’s only about a 16% probability of a 25-basis point rate increase by the BoC before the year end.
