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Summary: Weaker-than-expected June retail sales data in Canada weigh on the fragile Canadian Dollar (CAD). Market trading remains cautious ahead of remarks by Fed Chairman Powell at the Jackson Hole central bank conference.

Fundamentals

Retail sales in Canada increased by 0.1% month-on-month in June to CAD 6.59 billion, surpassing the expected 0.0% growth. Excluding gas stations and fuel, motor vehicle, and parts dealers, retail sales decreased by -0.9% on a monthly basis.

For the entire second quarter, sales remained unchanged in value but declined by 0.8% in volume terms.

Preliminary estimates suggest a 0.4% month-on-month increase in sales for July.

In terms of quantity, retail sales in Canada saw a marginal decline of 0.2% in June. Among nine sub-sectors, only three saw an increase in sales: motor vehicle and parts dealers, sporting goods stores, and gas stations. Retail sales excluding automobiles fell by 0.8%, below the expected growth of 0.3%.

The report reveals that Canadians continued to spend on larger items like cars in June, possibly as a result of pent-up demand and delayed shipments during the pandemic. Despite ongoing growth in sporting goods sales, expenditure on other rate-sensitive products, including clothing and furniture, contracted in June. It's evident that the cumulative impact of the 475-basis-point rate hike is just beginning to affect household budgets.

The Canadian GDP report for the second quarter will still be released before the Bank of Canada's next round of interest rate decisions. The latest rounds of growth, employment, and retail sales data have provided the Monetary Policy Committee with sufficient grounds to once again pause the cycle of interest rate hikes.

As more mortgage loans roll over at higher rates, Canadian households will allocate more of their income toward debt servicing. This implies that retail sales could continue to be subdued. Meanwhile, even though concerns about sustained inflation haven't waned, the central bank should believe that growth below potential levels can still guide inflation back to target.

On the market front, the ongoing rise in U.S. long-term Treasury yields continues to exert upward pressure on the USDCAD pair. This asset has climbed for the fifth consecutive week. During the Jackson Hole central bank conference, the Fed might underscore the surge in July inflation data and reiterate the stance from the latest meeting minutes, where a majority of committee members expressed openness to further rate hikes. If the Jackson Hole conference leans hawkish, it could lead to a broadly stronger U.S. Dollar and simultaneously weaken the Canadian Dollar and other commodity-linked currencies.

Technical Analysis

Since the beginning of this month, the USDCAD pair has maintained a distinct upward trajectory. After a roughly 3% increase in August, the bullish momentum has temporarily subsided.

However, based on our observations, the asset is facing the risk of an impending upside breakout from a "triangle consolidation" pattern. Given that the daily relative strength index (RSI) is in overbought territory, the prospect of a modest retracement to the 1.3500 range or slightly below, as observed in the initial trading days of this week, should not be disregarded.

Nonetheless, this might provide a fresh opportunity for establishing long positions, with a target around the upward resistance line at the 1.3720 level (as shown in the chart). The rationale behind this lies in the fact that, despite the overbought condition of the market, there are still no signs of a decline as of today, and such structural prices can only be forced higher.

The USDCAD pair has surpassed the 50% Fibonacci retracement level between the 2023 low at 1.3092 and the 2022 high at 1.3978, suggesting a potential return to a mid-term trend. However, a breach below 1.3350 would invalidate the bullish outlook.

Trading Recommendations

Trading Direction: Long

Entry Price: 1.3530

Target Price: 1.3720

Stop Loss: 1.3410

Valid Until: 2023-09-07 23:55:00

Support: 1.3497, 1.3473, 1.3412

Resistance: 1.3574, 1.3604, 1.3652