USD/CAD Extends Gains as Consumer Spending in Canada Slows

For the fourth consecutive trading day, the Canadian dollar weakened against the greenback. The Bank of Canada's reservations about the outlook for the Canadian economy, the consequences of a strong currency and their recent comment about not raising interest rates until the summer has stripped away the optimism in the loonie. Unfortunately recent economic data has only added pressure on the Canadian dollar. The labor market took a turn for the worse in December while the manufacturing sector contracted and the trade surplus turned into a deficit.

This morning, Canadian retail sales was released and consumer spending fell 0.3 percent in November. Excluding purchases of autos, consumer spending was flat. The upward revision to the prior data in the headline release was offset by the downward revision to core retail sales - therefore on balance this was a negative report. Although Canadians increased their purchases of furniture, electronics, building supplies and groceries, they cut back significantly on their spending on winter clothing due to unseasonably warm weather. Nonetheless, this was the first time in 3 months that retail sales growth slowed which adds to the mounting evidence of a slowing recovery.

Technically the recent turn in USD/CAD has been very strong, but the currency pair is closing in on a significant resistance level near 1.06 which is the 61.8% Fibonacci retracement of the October 2007 to March 2009 rally as well as the second standard deviation Bollinger Band. The 100-day SMA also right above current levels.