TORONTO, Aug 22 – The Canadian dollar posted its sharpest rally in nearly three months on Friday, bouncing back after U.S. Federal Reserve Chair Jerome Powell hinted at a more dovish monetary policy stance. The move helped the loonie recover its earlier weekly losses, while stronger retail sales data at home provided additional support.
Key Highlights
- CAD gained 0.7% against the U.S. dollar, trading at 1.3815 per USD, or 72.39 U.S. cents.
- The rally marked the loonie’s largest one-day gain since May 23.
- June retail sales rose 1.5%, in line with expectations.
- Bond yields declined across the curve, following U.S. Treasuries.
Powell’s Dovish Tone Boosts Risk Appetite
At the annual Jackson Hole symposium, Powell acknowledged growing risks to the U.S. labor market and the impact of tariffs on inflation. While stopping short of committing to a rate cut, he signaled that policymakers could lower rates as soon as the September Fed meeting.
Scotiabank strategists Shaun Osborne and Eric Theoret noted: “The CAD had been roughed up somewhat by the USD earlier this week but is ending on a strong note following cautiously dovish comments from Powell.”
Canada Eases Trade Tensions with the U.S.
Prime Minister Mark Carney announced that Canada will roll back many retaliatory import tariffs on U.S. goods, while seeking closer trade and security ties with Washington. Economists say the move could ease pressure on consumer prices, particularly food costs, though it may reduce tariff revenue for the federal government.
Domestic Data: Retail Sales and Inflation
Retail activity in June climbed 1.5%, supported by stronger food and beverage spending. However, preliminary July data pointed to a 0.8% decline, suggesting a softer start to the third quarter. Earlier this week, weaker-than-expected inflation data raised expectations that the Bank of Canada could resume rate cuts in the coming months.
Bond Market Reaction
Canadian government bond yields mirrored declines in U.S. Treasuries. The benchmark 10-year yield fell 5.3 basis points to 3.434%, reflecting expectations of looser monetary conditions ahead.
Outlook
While the loonie ended the week broadly unchanged, Friday’s surge underscored how sensitive the currency remains to shifts in Fed policy and trade relations. Traders will be watching closely for the Fed’s September meeting outcome and further Bank of Canada signals as policymakers navigate inflationary pressures and slowing growth.
The Canadian dollar’s near-term direction will likely hinge on a mix of U.S. monetary policy signals, domestic economic data, and the trajectory of Canada-U.S. trade talks.
