USD/CAD is stabilising around 1.4330. Bank of Canada (BOC) Governor Tiff Macklem expressed concerns about potential economic impacts stemming from tariffs, noting that uncertainty may harm the economy.
Canada’s headline and core CPI inflation rates are above the BOC’s Q1 expectations, limiting the bank’s ability to ease policies in response to trade uncertainties. A combination of high inflation and poor growth prospects poses challenges for the Canadian dollar.
Retail Sales Performance
Statistics Canada indicates a 0.4% month-on-month decrease in retail sales for January, following a 2.5% increase in December. A recent BOC survey reveals that Canadians are increasingly concerned about job security and financial health due to trade tensions, leading to more cautious spending practices.
With USD/CAD hovering around 1.4330, eyes remain on how economic pressures shape monetary policy moving forward. Macklem has raised concerns over the potential economic strain caused by tariffs, particularly in how uncertainty may slow activity. Given this backdrop, attention shifts to inflation figures and consumer behaviour, both of which play key roles in forecasting central bank actions.
Inflation remains stubbornly above the Bank of Canada’s initial quarterly estimates, leaving limited room for interest rate adjustments despite growing external pressures. Central banks typically aim for price stability, but with inflation running ahead of forecasts, rate cuts become a much harder sell. This is compounded by a lacklustre growth forecast, straining the domestic currency further. High inflation paired with weakening economic performance puts policymakers in a difficult position, as any easing could fuel price pressures while inaction risks deepening a downturn.
Retail sales data offers additional context. January’s decline of 0.4% suggests that December’s sharp 2.5% rise was more an outlier than a trend. A cooling in consumer activity is not surprising, given the concerns laid out in the latest survey from the BOC. Canadian households are growing more uneasy about job stability and overall financial health, factors that typically lead to restrained spending. When people cut back on discretionary purchases, it slows economic momentum, further complicating recovery efforts.
Market Considerations
Given these conditions, traders should track upcoming inflation reports and central bank communications closely. Any signs of a shift in monetary policy stance—whether through rate guidance or revised economic projections—could spark volatility in the currency market. Likewise, additional weakness in consumer activity would reinforce a less optimistic outlook, exerting further pressure.
