Categories: Markets

USD / CAD testing 1.2600 level as bears see 2021 lows

  • USD / CAD is again trading near 2021 lows at 1.25889 and testing the 1.2600 level.
  • The CAD appears to be getting support from a sharp rise in Canadian bond yields.

The USD / CAD it is near 2021 lows at 1.25889 and testing the 1.2600 level. US bond yields continue to rally, with the 10-year US yield now above 6bp on the day and above the 1.35% level. The rise appears to be the result of growing fears that world economies (and the US in particular) will “overheat” later in the year / in 2022 as a result of 1) the amount of stimulus no fiscal and monetary unleashed in 2020 to combat the economic weakness induced by the Covid-19 pandemic and 2) vaccines control the pandemic and unleash more than a year of pent-up demand.

This, the markets seem to fear, will make central banks have to abandon the accommodative policy earlier than expected, hence the massive sale of bonds. Global bond markets are now getting some contagion from US markets; Canadian 10-year yields were up 7 basis points on the day above 1.21% and are now up almost 20 basis points on the week. This appears to be giving the loonie some headwinds at the end of the week. The same can be said for the AUD and the NZD, which have their eyes on rising Australian and New Zealand yields.

Thus, the CAD has ignored bearish impulses from lower crude oil prices, which have been coming out of the boil on the last trading day of the week as weather-related production disruptions subside in the southern US, and very weak retail sales numbers for December.

Retail sales disappointment

Stats Canada released December retail sales growth data at 1:30 PM GMT, which was significantly worse than expected. Core Retail Sales Volumes fell 3.4% MoM, worse than forecasts for a 2.5% drop, while Core Retail Sales saw an even steeper drop of 4.1% MoM, without expectations of a more modest 2.0% drop. %. Meanwhile, Stats Canada forecast a 3.3% month-on-month drop for top retail sales in January.

The lower-than-usual spending in the holiday season can probably be explained by the implementation of stricter Covid-19 closure restrictions, but with the reopening of non-essential stores starting in February, retail sales should rebound in the first Quarter 2021. “As the vaccination process accelerates,” Capital Economics comments, “we expect total consumption to recover strongly by the end of this year.”

Technical Levels