The Canadian Dollar (CAD) weakened against the US Dollar (USD) on Friday, with the USD/CAD pair trading around 1.3818, its highest level since April 13 [1]. This decline in the Loonie occurred despite stronger-than-expected Canadian Retail Sales data for March, which rose 0.9% month-over-month, surpassing both the previous reading of 0.7% and market expectations of 0.6%. Retail Sales excluding automobiles also increased by 1.4%, outperforming forecasts and the prior figure [1]. However, these positive economic indicators did little to support the CAD, as market participants remained focused on ongoing US-Iran negotiations and the broader strength of the US Dollar.
Uncertainty surrounding the outcome of US-Iran talks contributed to the Greenback's appeal. US Secretary of State Marco Rubio noted “some progress” in the negotiations but cautioned, “I would not exaggerate it,” emphasizing that “we’re not there yet.” A senior Iranian source echoed this sentiment, stating that “no deal has been reached yet, but gaps have narrowed.” Diplomatic efforts, mediated by Pakistan, are ongoing. Meanwhile, oil prices remained below recent highs, exerting additional pressure on the commodity-linked Canadian Dollar, given Canada’s role as a major crude exporter [1].
The US Dollar also found support from domestic economic data. The University of Michigan’s Consumer Sentiment Index fell to 44.8 in May from 48.2, and the Consumer Expectations Index declined to 44.1 from 48.5. Despite weaker sentiment, inflation expectations rose: the 1-year outlook increased to 4.8% from 4.5%, and the 5-year outlook climbed to 3.9% from 3.4%. These figures signaled persistent consumer concerns about inflation, particularly in relation to elevated oil prices [1].
Following these developments, US Treasury yields rebounded, with the benchmark 10-year yield ending a two-day losing streak as traders increased bets that the Federal Reserve may need to raise interest rates by year-end to address rising inflation. However, Fed Governor Christopher Waller stated that the central bank “should not consider hikes in the near future” and intends to “hold rates steady in the near term,” while emphasizing that inflation will guide future policy decisions [1].
On the day, the Canadian Dollar was strongest against the New Zealand Dollar, according to a table of percentage changes against major currencies [1].
CONCLUSION
Despite robust Canadian retail sales, the Canadian Dollar weakened as traders prioritized US-Iran negotiations and expectations of a hawkish Federal Reserve. The US Dollar's strength was further supported by rising inflation expectations and rebounding Treasury yields. Market sentiment remains cautious, with inflation and geopolitical developments likely to drive future moves.