Canadian Dollar Firms After April Retail Sales Top Estimates, May Inflation Data Eyed

CANADA RETAIL SALES REPORT:

• Canada’s April retail sales grow 0.9% month-over-month, one tenth of a percent above expectations
• Strong consumer spending suggests that consumption remains resilient despite soaring inflation
• Canadian dollar extends gains against the U.S. dollar after the retail sales data surprise to the upside

Most Read: Canadian Dollar Forecast – Has Loonie Weakness Run its Course? Setups for CAD/JPY, USD/CAD

Statistics Canada released this morning its latest retail trade survey. According to the agency, April retail sales grew 0.9% on a monthly basis, slightly above expectations of a 0.8% increase, easing worries that mounting price pressures and falling real incomes are denting spending.

Looking at the drivers, the report showed that purchases grew in 6 of 11 subsectors, but the biggest gains came from general merchandise stores, which jumped 4.2% month-over-month. Separately, in its advance estimate, the agency said May retail sales likely rose 1.6%, although it cautioned that the figure will be revised when more information is gathered.

The value of April’s overall purchases, along with preliminary results for May, suggests that the Canadian economy maintained momentum at the start of the second quarter amid consumer resilience, a good sign for gross domestic product and the economic outlook.

The Canadian dollar extended its daily advance against the U.S. dollar following the retail sales report, but moves were limited as traders are more concerned about Wednesday’s inflation report (USD/CAD moved down from 1.2947 to 1.2939). Expectations are for May CPI to rise 1% month-over-month, bringing the annual reading to 7.4%, a new three-decade high.

The strength in household consumption, coupled with sky-high inflation, could lead the Bank of Canada to continue to tighten monetary policy aggressively in the coming months in its effort to restore price stability, a scenario that would support the “Loonie”. However, the speed and magnitude of future rate hikes could change if the inflation profile deteriorates further. We should have a more nuanced and accurate picture of how inflationary forces are evolving in the broader economy tomorrow once May’s results are released.

USD/CAD 3-MINUTE CHART

Source: TradingView

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—Written by Diego Colman, Market Strategist for DailyFX