USD/CAD stabilises around 1.2500 as crude oil market volatility calms

• USD/CAD is trading close to 1.2500 and trading more subdued as the sell-off in crude oil markets eases up.
• Canadian retail sales were stronger than expected but have not had a lasting impact on the loonie.

USD/CAD trades a little higher on the day just to the north of the 1.2500 level but has dropped back from earlier session highs in the 1.2540s. The pair currently trades higher by about 20 pips or just under 0.2%.

Driving the day

The loonie was hit hard on Thursday in tandem with a sharp decline in crude oil prices. With crude oil prices much more stable and even creeping a little higher (WTI is back above $60.00 and approaching $61.00), the downwards drag on the loonie is being somewhat lessened.

Elsewhere, aside from crude oil price action and a stronger than anticipated Canadian Retail Sales report for the month of January, there has not been too much else going on of note for USD/CAD; the US dollar saw some fleeting strength in wake of the Fed’s decision not to extend pandemic-era supplementary leverage ratio (SLR) rules at the end of the month – these rules had allowed banks to hold US treasuries and deposits on their balance sheets exempt from normal capital ratio requirements, a ruling the Fed decided upon in the early stages of the Covid-19 crisis order to stem excessive selling pressure in US treasury markets. The SLR rules will expire at the end of the month.

USD/CAD rose briefly as high as the 1.2540s on this news the market impact has not been long-lasting and a recently published article from Fed Chair Jerome Powell published in the WSJ contained no new information regarding the Fed’s policy guidance or outlook on the economy and thus did not move markets at all. Next week, things are set to be quiet for loonie traders, with just comments from Bank of Canada Deputy Governor Toni Gravelle to keep an eye on, whilst USD traders will have to keep tabs on a heft dose of Fed speak (including Fed Chair Powell speaking on three separate occasions), as well as preliminary Markit PMIs and Core PCE inflation data.

Canadian Retail Sales Recap

Canadian Retail Sales numbers for the month of January came in stronger than expected on Friday; the MoM pace of decline in headline sales was just 1.1% versus forecasts for a much steeper drop of 3.0%. Core retail sales also saw a more modest than expected drop of just 1.2% MoM versus expectations for a drop of 2.6%. The drop reflected a massive decline in the sales of some sectors that were shuttered in line with the closure of non-essential retail stores.

However, StatsCan’s preliminary estimate for Retail Sales growth in February indicated that most of the declines in sales seen in December and January was quickly reversed as the economy came out of lockdown. According to Capital Economics, “the good news is that some of the damage appears to have been undone last month”. However, the economic consultancy caveats that “with many restrictions still in place, it is unlikely that total consumption will recover until the second half of 2021”.