Canadian spending data pushes USDCAD under 1.4000

Canadian consumer spending accelerated in August. According to Statistics Canada, retail sales rose 1.2% to $74.6 billion, with all nine subsectors posting increases. Notably, sales volumes also climbed 1.2%, indicating genuine demand behind the nominal growth.

The gains were not limited to auto and fuel categories. Core sales increased 1.1%, recovering from a 0.7% drop in July, driven by food, general merchandise, and health/personal care retailers. Gasoline provided a contrast: revenue rose 1.7% but volumes decreased 0.5%, suggesting price increases rather than higher consumption.

Quick analysis:

The latest data provides a positive sign for Canada's economy, though the wider picture remains mixed. The rise in retail volumes is a bright spot following July's flat real GDP. This suggests a stronger contribution from goods consumption in August, but retail spending represents just one component of aggregate growth.

Employment data raises concerns. Canada shed 68,000 jobs in September, with 35,000 full-time positions lost, and unemployment rose to 6.5% from 6.4%. This marked a second straight monthly decline. Consumer spending has held up, but persistent job losses could undermine that resilience. Notably, August retail data precedes September's employment drop, and the September spending estimate remains initial.

Inflation trends also require deeper examination. September's CPI increased 3.1% year-over-year, compared with 3.0% previously, mainly due to gasoline. Stripping out gasoline, inflation decelerated to 2.2% from 2.4%. Core gauges softened too: CPI-trim dipped to 1.8% from 1.9%, and CPI-median eased to 1.9% from 2.0%. These indicators smooth out extreme price swings. The takeaway is that elevated energy costs are pushing headline inflation up, while underlying price pressures have cooled.

The Bank of Canada faces conflicting signals: solid spending, softening employment, and easing core inflation despite the energy-boosted headline rate. The Bank kept its policy rate at 2.25% in September, with the next decision and fresh projections set for October 28. In my view, today's retail data may lessen the need for near-term loosening, but employment worries remain. Typically, stronger spending boosts the Canadian dollar, weighing on USDCAD, but the mixed economy clouds the outlook for a sustained decline.

What are the price action and technicals telling traders?

Typically, firmer Canadian consumption lifts the loonie and drags USDCAD lower. That dynamic is playing out, with technicals confirming the bearish lean.

USDCAD dropped to a fresh session low at 1.3983, slipping back under the key support of 1.4000.

During the Asian-Pacific session, the pair touched 1.39963, but sellers failed to hold below 1.4000. The recovery then carried the price toward the 50% retracement of the rally from the August 21 low at 1.40149. It peaked at 1.4018 before turning lower again.

Buyers attempted to push through the 50% level but couldn't follow through. The subsequent reversal to new lows maintains selling pressure.

What comes next on the downside?

The immediate downside objective is a swing zone from late March spanning 1.3948 to 1.3966. Sellers must first push under the upper edge at 1.3966, which would then allow a move toward 1.3948.

The 61.8% Fibonacci retracement of the advance from the August low aligns close to the lower end of that zone. This reinforces its significance as a support area where buyers might step in and set risk levels.

On September 16, after the Fed hiked rates to 4.0%, USDCAD rallied above that swing zone. The uptrend eventually led to a double top at 1.42984, seen on October 9 and October 14.

A decisive move below 1.3948 and the adjacent 61.8% retracement would hand sellers further technical success, turning focus to the 200-day moving average at 1.38814.

Seven consecutive lower closes?

After the second peak last Wednesday, USDCAD has recorded lower closes for six straight trading sessions. The previous session's close was around 1.4005. If it finishes today below that mark, the streak would reach seven.

Sellers possess the momentum. Their task now is to continue breaking and holding below subsequent support levels.

What would hurt the downside momentum?

For buyers, the initial requirement is a recovery above the 50% retracement at 1.40149. Holding above that point would relieve some immediate downside pressure.

Further up, buyers must overcome two more barriers:

• 100-day moving average at 1.40432
• Falling 100-hour moving average at 1.4049

These moving averages form a key resistance area. A solid break above both would frustrate sellers expecting further declines and provide buyers with a firmer technical footing.

Until that happens, the unsuccessful rebound above the 50% level and the drop to new lows ensure sellers remain dominant.