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Jump in Canadian retails sales sparks rally in the Loonie

The Canadian dollar rose to its strongest level against its US peer in over a month following a report showing Canadian retails sales rose the most in three years in May.

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USD/CAD had fallen 0.36% to 1.0296 by mid-afternoon in New York and the Canadian dollar strengthened against most commonly-traded currencies after a report from Statistics Canada showed retail sales were 1.9% higher in May, rising to a record CAD 40.4 billion.

The magnitude of the increase took analysts by surprise, who had given a median forecast of just +0.4% in a survey conducted by Reuters. Before this report, Canadian retail sales had grown by just 0.1% on average in the preceding six months.

Strength was broad-based, with sales picking up in all 10 provinces. The biggest gains were seen in automobiles and auto parts. Following on from last week’s big increase in wholesale and manufacturing sales, it points to the Canadian economy heating up, which may mean a rate hike coming sooner than had previously been anticipated.

Second-quarter GDP estimates are likely to be revised upwards by economists in the wake of this robust monthly gain and factoring in these strong retail sales, the Bank of Canada’s 1% forecast for the second quarter looks rather pessimistic.

The Bank of Canada has maintained a bias towards tightening for many months, but its benchmark lending rate has been kept on hold at 1% for nearly three years. New governor Stephen Poloz had said in his monetary-policy statement that ‘as long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate.’

In light of today’s large retails sales number, that slack looks like it may not be there for much longer.

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