Will Canadian Retail Sales Push USD/CAD Below 1.0000 On Friday?

SEP 21
Retail Sales (JUL) (08:30 EST; 12:30 GMT)
Retail Sales ex Autos (JUL) (08:30 EST; 12:30 GMT)

Expected: 0.0%
Expected: 0.3%

Previous: -0.9%
Previous: -0.3%

How Will The Markets React?
Canadian retail sales growth excluding autos is expected to improve slightly during the month of July at a rate of 0.3 percent. However, the headline reading is anticipated to fall flat after plummeting 0.9 percent the month prior. Domestic demand has increasingly become a major contributor to broad expansion in the Canadian economy, though exports remain the most critical lynchpin of growth. With the national unemployment rate at 33-year lows of 6.0 percent and wage growth picking up as well, it’s no wonder that retail sales have shown such improvements. If the overall export economy is to weaken expansion as expected as the Canadian dollar moves to parity with the US Dollar, domestic producers will become increasingly dependent on Canadians to maintain overall production levels more or less constant. If an export slowdown hurts overall employment levels, however, we could easily see scaled back consumer spending and it is one of the many risks to economic expansion. Nevertheless, there is upside potential for the July retail sales report, as wholesale sales surprisingly surged a whopping 2.0 percent on strong demand across the product groups. Though the correlation is not perfect, large changes in the wholesale report are often reflected as large changes in the retail group, creating the potential for a stronger-than-expected result on Friday that could pushed Canadian equities and the Loonie higher.
Bonds - 10-Year Canadian Government Bond Futures
December 10-year notes dropped firmly on Thursday, reaching weekly supports in the mid-111 zone with strong support looming below at 111.14. Friday’s retail sales report could push CGBs even lower, however, especially if the data is much stronger-than-expected with the contract potentially targeting considerable monthly supports in the 110.20-70 zone. On the other hand, a bout of risk aversion in the markets along with soft consumption figures could be enough to push CGBs to bounce higher.

The Canadian dollar has shown a powerful bout of strength in recent days, as USDCAD barrels through fresh 30-year lows in a mad dash for 1.0000 as the pair barrels through fresh 30-year lows. While this has generally been the result of significant weakness in the US Dollar throughout the forex markets (EURUSD has hit record highs of 1.4097), the sharp decline in USDCAD is very hard to ignore as this marks the first time that the Loonie has achieved parity with the greenback since November 1976. A break below this very critical level faces little support, though option barriers at 0.9950, 0.9900, and 0.9800 should slow sharp declines for the pair. Event risk out of Canada may only accelerate gains for the Loonie, as retail sales are estimated to improve slightly. However, given the strong improvement in wholesale sales, there is upside risk for the retail release. On the other hand, if Canadian retail sales actually prove to be weaker-than-expected, the data could help slow some of the USDCAD declines.

Equities - S&P/TSX Composite Index

Canadian equities followed Wall Street lower on Thursday, as the S&P/TSX Composite Index continued to back away from resistance at 14,025, though support at the 100 SMA limited the index’s declines. While Canadian equities will likely remain a follower of broad moves in the US stock markets, gains could be in store for the S&P/TSX, especially if Canadian retail sales are stronger-than-expected and signal that domestic demand remains resilient enough to pick up the slack of outlooks for slowing export growth. Given the surge in wholesale sales that we saw this week, this is actually very possible. If traders take kindly to the news and US equities start the day out on a positive note, the overall bullish sentiment of the equity markets could be enough to push the S&P/TSX to test the 78.6 percent retracement level of 14,646.82 - 12,463.78 at 14,180.

Written by Terri Belkas, Currency Analyst for DailyFX.com