Canadian Confusion

The Canadian dollar surged again Thursday after a strong retail sales report but the real question is when the Bank of Canada will hike. The AUD and EUR were laggards in the otherwise low-key day. The June Japan manufacturing PMI is up next.

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Canadian retail sales rose 0.8% compared to 0.3% expected. Excluding autos, sales were up 1.5% compared to 0.7% expected. The strong numbers have been ongoing for months and household consumption is now forecast to rise 5% this year.

In a surprise turn, the Bank of Canada shifted gears last week and switched to a hawkish stance after remaining stubbornly neutral for months. USD/CAD is down 3 cents since including more than a cent on Thursday.

In that same timeframe, odds of a BOC hike on July 12 has risen to 50/50 from 5%. Poloz has a reputation as someone who doesn't mind surprising the market.

But let's recap. All that Wilkins said is that the BOC “will assess whether all the stimulus in place as economic growth continues and, ideally, broadens further.” There is no urgency in that statement and a good retail sales report isn't enough to add any. Meanwhile, oil is down nearly 20% in a month.

The BOC will also have noted the recent decline in Toronto home prices. According to a preliminary realtor report released Wednesday, prices have tumbled 12% since April. By hiking, the BOC would be risking popping a bubble that's already deflating.

So come July 12, the trade will likely be to sell CAD ahead of the headlines but until then, it's tough to bet against an economy that's cranking out good numbers.

Another economy that's done well this year is Japan. The calendar is generally quiet in Asia-Pacific trading Friday but the Nikkei Japan PMI due at 0030 GMT could get some attention. The prior reading was 53.1.