The Canadian dollar, known as the loonie, showed resilience on Friday, holding its ground against the US dollar. This stability came despite fresh data revealing a continued slowdown in consumer spending within the domestic economy.
Retail Sales Show Sluggish Household Spending
Statistics Canada reported that retail sales declined by 0.2% month-over-month in October. This followed a steeper drop of 0.9% in September. The decrease was primarily driven by lower sales at food and beverage retailers. The figures fell short of economist expectations, which had predicted a flat reading with no growth.
However, a preliminary estimate for November offered a glimmer of hope, suggesting a potential rebound with sales projected to jump by 1.2%. Analysts caution against reading too much into a single month's data, noting the inherent volatility.
"Overall, today’s figures suggest that household spending has remained relatively stagnant thus far in the fourth quarter, despite some monthly volatility," noted Tiago Figueiredo, a macro strategist at Desjardins.
Bank of Canada's Stance and Market Reaction
The weak consumption trend is being closely monitored by the Bank of Canada (BoC). Despite the soft data, experts believe it is unlikely to prompt immediate further action from the central bank. "While the Bank of Canada is keeping a close eye on the weak trend in consumption, these numbers aren’t soft enough to have central bankers move off the sidelines," Figueiredo added.
Earlier in December, the BoC had signalled a potential pause in its monetary easing cycle after it cut its benchmark interest rate to a three-year low of 2.25%.
In currency markets, the loonie traded nearly unchanged at 1.3775 per US dollar (or 72.60 US cents). It moved within a narrow range of 1.3756 to 1.3801 throughout the session. For the week, the currency was also largely flat, halting a run of three consecutive weekly gains, following cooler-than-expected domestic inflation data.
Global Factors and Bond Market Movement
External factors played a role in the day's trading. The US dollar gained strength against a basket of major currencies, partly due to a sharp weakening of the Japanese yen. The Bank of Japan raised interest rates to a 30-year high but failed to provide clear guidance on future hikes, creating market uncertainty.
Supporting the commodity-linked loonie, the price of oil—a key Canadian export—rose by 1.2% to $56.80 a barrel. The increase was attributed to market anticipation of news regarding a potential peace deal between Russia and Ukraine.
In the debt market, Canadian government bond yields moved higher, mirroring trends in other sovereign debt markets after the BoJ's policy shift. The yield curve steepened, with the benchmark 10-year yield climbing 3.7 basis points to 3.481%.
