Canadian Dollar Hits Two-Month High on Strong Factory Data, Weaker USD

The Canadian dollar climbed to a two-month high against its U.S. counterpart on Friday, bolstered by upbeat domestic economic data and a narrowing in the yield spread between Canadian and U.S. government bonds.

The loonie strengthened 0.4% to 1.3875 per U.S. dollar, which translates to 72.07 U.S. cents. During the session, the currency touched 1.3865, its strongest point since June 3. The Canadian dollar is on track for a 0.5% weekly gain, marking its third consecutive week of appreciation.

Diverging Economic Data

The rally was primarily driven by a divergence in economic reports from the two countries. In Canada, factory sales for June edged up 0.1% month-over-month, marking the fifth straight month of growth, while sales volumes saw a more significant increase of 1.2%. A separate report showed that wholesale trade expanded by a robust 2.8% in June.

Conversely, the U.S. dollar weakened against a basket of major currencies following an unexpected decline in U.S. retail sales for July. This weak U.S. data added momentum to the Canadian dollar's advance.

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Yield Spread and Market Outlook

Support for the loonie also came from the bond market. The yield spread between Canada's 2-year government bond and the equivalent U.S. Treasury has narrowed by approximately 17 basis points this month, making Canadian assets relatively more attractive to investors. The U.S. yield currently remains about 120 basis points higher.

Strategists Shaun Osborne and Eric Theoret at Scotiabank noted the shifting economic backdrop. "Friday's soft U.S. retail sales data and better-than-expected Canadian manufacturing sales reinforces the recent shift in the relative trend in economic data between the two countries," they wrote in a research report, adding that this trend will "gradually be reflected in the exchange rate's movements."