Canadian dollar weakens on retail data, oversold market

Wed Aug 22, 2012 5:49pm EDT
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By Solarina Ho

TORONTO (Reuters) - The Canadian dollar continued its retreat on Wednesday from the 3-1/2 month highs of the previous session, at one point hitting its weakest level in more than a week against the U.S. currency after the government reported an unexpected drop in retail sales.

The decline in June sales confirmed a weaker trend in consumer spending that will likely trim overall growth in the second quarter and raises questions about the Bank of Canada's hawkish slant on monetary policy.

"The market's been heavily oversold over the last few weeks in particular, so seeing a corrective bounce isn't really untoward. The charts were suggesting we're going to see a short term bounce," said Gareth Sylvester, director at Klarity FX.

He noted that retail sales data was the latest in a string of key economic indicators all pointing toward a softening Canadian economic outlook.

"I think moving forward, if the economic indicators continue to show signs of weakening economic outlook, I think the Bank of Canada could certainly shift into a more neutral stance. That might just take the edge off some of the CAD's appeal," said Sylvester.

Doubts about Europe's progress on its debt crisis and weak export data from Japan also underscored the problems facing the global economy.

The Canadian dollar closed at C$0.9914 versus the U.S. dollar, or $1.0087, weaker than Tuesday's North American session close at C$0.9897, or $1.0104. After the retail sales data, it drifted as low as C$0.9948, or $1.0052, its softest level since August 10.

"We're running out of positive steam and the next wave of support to redefine the market," said David Tulk, chief Canada macro strategist at TD Securities.   Continued...