USD/CAD rebounds as weak Canadian Retail Sales and firmer USD weigh on Loonie

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USD/CAD recovers from intraday lows on Friday as softer-than-expected Canadian Retail Sales data weighs on the Canadian Dollar (CAD), while a rebound in the US Dollar (USD) provides additional support to the pair.

USD/CAD rebounds from intraday lows as a stronger US Dollar and softer Canadian Retail Sales weigh on the Loonie.
Oil-driven gains fail to support the Loonie amid safe-haven demand for the US Dollar.
BoC and Fed keep interest rates unchanged, maintaining a cautious policy stance amid rising inflation risks.

At the time of writing, USD/CAD is trading around 1.3735, rebounding from an intraday low near 1.3699. Meanwhile, the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading near 99.74, recovering after falling about 1.10% on Thursday.

Data released by Statistics Canada showed that Retail Sales rose by 1.1% MoM in January, rebounding from a 0.4% decline in December, but falling short of the 1.5% market expectation. Meanwhile, Retail Sales excluding Autos increased by 0.8%, also missing forecasts of 1.2%, after being revised to 0.0% from 0.1%.

Although the January Retail Sales data predates the recent surge in Oil prices driven by the war in the Middle East, the softer-than-expected print suggests domestic demand was already losing momentum. This adds to concerns that rising energy costs could further weigh on consumption in the months ahead.

Bank of Canada (BoC) Governor Tiff Macklem said in Wednesday’s monetary policy announcement, after leaving the benchmark interest rate unchanged at 2.25%, that it is too early to assess the full impact of the conflict on Canada’s economic growth. However, he cautioned that elevated energy prices could squeeze household budgets, leaving consumers with less income available for other spending.

At the same time, Macklem noted that if higher Oil prices are sustained, they could support income from energy exports, given that Canada is a net exporter of Oil.

However, since the eruption of the US-Israel war with Iran, the resulting surge in Oil prices has failed to provide sustained support to the commodity-linked Loonie, as traders increasingly seek safety and liquidity in the US Dollar amid heightened geopolitical uncertainty.

Meanwhile, fading Federal Reserve (Fed) rate-cut bets also underpin the Greenback. The Fed kept its benchmark interest rate unchanged at 3.50%–3.75% on Wednesday, while highlighting risks to both sides of its dual mandate. However, the updated dot plot still points to one rate cut in 2026, even as policymakers revised their inflation forecasts higher.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

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