Investing.com -- The Canadian dollar weakened against its U.S. counterpart on Thursday as hotter than expected U.S. PPI data and a cooler than expected gain in retail sales weighed on market sentiment, pressuring equities and the risk-sensitive loonie.
U.S. Headline PPI inflation rose 0.6% month-over-month in February, taking the annualized rate to 1.6%, well above expectations for a 1.1% pace.
The PPI data follows another recent hotter than expected U.S. inflation reading, after data earlier this week showed that headline CPI rose 3.2% on a yearly basis in February, compared to expectations for a 3.1% gain. Core inflation also remained sticky.
Simon Harvey, head of FX analysis for Monex Europe and Monex Canada notes that "These hotter inflation readings mean that there is a lingering risk that the Fed won't cut this year and that's causing some jitters across markets," said
"For CAD specifically, higher yields, lower retail sales and lower equities is a negative mix."
U.S. retail sales rose 0.6% month-on-month in February, lower than expectations for a 0.8% increase.
Despite the two hot U.S. inflation reports, however, markets continue to expect a rate cut from the Fed in June. The Bank of Canada meanwhile is expected to begin rate cuts in July at the earliest, but is expected to move more aggressively to cut rates than the Fed subsequently.
Stéfane Marion, analyst at National Bank of Canada (TSX:NA), notes that the BoC’s relatively more rapid easing cycle could prove a headwind to the loonie in the second half of 2024.
Marion writers, "The restrictive monetary policy in Canada can no longer be justified. As we continue to believe that rate cuts will be more aggressive on this side of the border, we still see USD/CAD moving above 1.40 in H2 2024”.