Loonie may edge higher after Canadian CPI and better retail sales – Forex News Preview


Melina Deltas, XM Investment Research Desk

Canada will publish its inflation data for the month of September at 1230 GMT on Wednesday together with retail sales figures for August. The recovery in retail sales has been V-shaped, with sales in June and July rebounding and surpassing February’s pre-pandemic levels. There is a critical juncture in the economic recovery from Covid-19 that implies more attention is needed on CPI changes as the loonie continues to head north.

Will CPI and retail sales figures help the loonie?

The projection for the monthly CPI is for it to remain negative at -0.1% in September, the same as previously. The annual inflation rate is predicted to rise to 0.4% from 0.1% before, holding well below the 2.0% midpoint target for another month.

Retail sales in Canada rose 0.6% m/m from a month earlier in July 2020, following a downwardly revised reading of 22.7% m/m gain in the previous month, which was the largest rise in retail trade on record. In August, retail sales are anticipated to have increased by 1.1% m/m. If the readings come out as estimated or better, this could help the Canadian dollar to move higher as they would increase confidence in the recovery.

BoC announces Financial System Review for 2020

This Financial System Review (FSR) provides an in-depth analysis of the affects of the Covid-19 pandemic and related containment measures on the Canadian financial system and considers the resulting implications for economic activity.

Lower policy interest rates are underpinning demand and helping to achieve the inflation target, with the next policy decision coming at the end of October. Enhanced regulatory flexibility is providing financial institutions with greater scope to continue lending. Coordination between authorities has been essential to creating mutually reinforcing policies. These policies can adjust to the pandemic’s impact on the economy.

Latest Coronavirus news in Canada

Canada surpassed 200,000 confirmed cases on Monday. Most confirmed Covid-19 cases come from Ontario and Quebec — two provinces that are facing tighter restrictions for the next 28 days in infected areas after a resurgence in cases. Since the onset of the pandemic, the BoC has established and expanded a range of facilities and purchase programs to address problems with market functioning and confidence.

Technical View: Dollar/loonie remains in descending movement

The Canadian dollar has been flattening against its weaker US counterpart over the last couple of daily sessions as investors grow more hopeful of a pre-election US stimulus package. If the numbers beat expectations, they could strengthen the currency, pushing the dollar/loonie pair even lower.

Otherwise, weaker inflation prints could ease momentum in the market as they would strengthen the case for a dovish Bank of Canada.

Looking at USDCAD, the price has been in a strong negative mode over the last seven months, posting a fresh eight-month trough below 1.3000 and is pushing efforts to continue the downside move, bringing support around the 1.3100 zone. Lower, the price could retest 1.2993 and the 21-month trough of 1.2950.

On the flip side, disappointing CPI and retail sales numbers could re-challenge the resistance around the 20-day simple moving average (SMA) at 1.3250 ahead of the falling trend line at 1.3280. Beyond that obstacle, the way would open towards 1.3420 and then up to the 200-day SMA at 1.3550.