Canadian Inflation, Retail Sales Preview: Data Will Need To Be Strong To Cheer The Lonely Loonie

• Canada releases Retail Sales for January, Inflation data for February on Friday at 12:30 GMT.
• Mixed data will likely see Retail Sales having the upper hand given experience.
• The Canadian Dollar is poorly positioned ahead of the figures.

Canadian Retail Sales

Canada reported a disappointing retail sales report for December: a drop of 0.8 percent MoM on the header and a plunge of 1.8 percent in Core Sales. While a slide was not unexpected given the strong showings beforehand, it came out well below expectations and sent the Canadian Dollar down. 

Markets are more cautious this time, with a modest gain of 0.1 percent projected in headline Retail Sales and 0.8 percent on the core. A bounce back is indeed plausible in January after consumers went back to business and before the weather worsened again in February. However, while the headline number seems cautious, the forecasts for the core look somewhat optimistic. 

Moreover, the jobs report for January showed a significant fall in positions, no less than 88,000. This may have had an adverse impact on consumption. Another source of worry is the rise in inflation in January: it may have hurt sales. All in all, it is hard to see a significant comeback in retail sales.

Canadian Inflation was firm, expected to moderate

As mentioned earlier, inflation beat expectations in January: The headline Consumer Price Index advanced by 0.7 percent MoM and 1.7 percent YoY. A more moderate outcome is on the cards now: 0.3 percent MoM and 1.6 percent YoY in February. A slowdown makes sense after acceleration and as global inflation, such as in the US and the euro-zone has not been too strong in the second month of the year.

Core CPI is expected to repeat a monthly gain of 0.5 percent and even accelerate from 1.2 percent to 1.4 percent YoY. Given a slower core figure in the US, this consensus sounds somewhat optimistic. A disappointment may be on the cards. 

All in all, the projections for the headline seem more realistic than those for the core figures, and core CPI tends to carry more weight.

Retail Sales are more important than Inflation

In the previous release, the figures were published on separate days, and each one got its space. The shortfall in sales hit the Canadian Dollar quite hard while stronger inflation figures had a minimal impact on the loonie. Previously, we had seen that when one figure beat expectations and the other missed, the Canadian Dollar favored the outcome in the Retail Sales Report rather than that of the Inflation report.

Moreover, the Governor of the Bank of Canada Stephen Poloz recently said that that the Canadian economy could enjoy further growth without creating too much inflation. This dovish stance may also see the BOC tolerating higher inflation to see enhanced growth. Therefore, realizing the growth potential matters more than inflation, being hot or cold. 

Canadian Dollar positioning

The Canadian Dollar is generally on the back foot on the dovish comments from Poloz, signs of an economic slowdown and most importantly, trade. Trump's tariffs and the fragile NAFTA negotiations weigh on the Canadian Dollar. Reports saying that the US has removed the demand to have 50 percent of car content produced in the US have alleviated some of the fears and pushed USD/CAD off the highs, but the protectionist approach of the Trump Administration weighs.

The significant levels to watch on the USD/CAD from top to bottom are 1.3320, 1.3180, 1.3100, 1.3000, 1.2920 and 1.2810. 

View a live chart of USD/CAD