Trading the News: Canada Retail Sales

What’s Expected:

Time of release: 07/22/2011 12:30 GMT, 8:30 EST

Primary Pair Impact:USDCAD

Expected: -0.3%

Previous: 0.3%

DailyFX Forecast: -0.6% to 0.2%

Why Is This Event Important:

Retail sales in Canada is expected to contract 0.3% in May after rising 0.3% in the previous month, and a drop in household spending is likely to spark a bearish reaction in the loonie as it instills a weakened outlook for future growth. At the same time, the headline reading for inflation is expected to fall back to an annualized 3.6% in June from 3.7% in the previous month, and the softer pace of price growth paired with a drop in consumption could lead the USD/CAD to retrace the decline from earlier this week. Indeed, the Bank of Canada has warned of a slowdown in the second-quarter, forecasting GDP to increase an annualized 1.5% during the three-months through June, and we may see Governor Mark Carney continue to endorse a wait-and-see approach in the second-half of the 2011as the region faces ‘substantial headwinds.’ However, as the BoC expects economic activity to gather pace over the coming months, an unexpected rise in private consumption is likely to strengthen the case for a rate hike later this year, and the loonie may continue to appreciate against its U.S. counterpart as the recovery in Canada outpaces economic activity in the world’s largest economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

Business Outlook Future Sales (2Q)

18.00

20.00

Net Change in Employment (JUN)

15.0K

28.4K

Gross Domestic Product (MoM) (MAY)

-0.1%

0.0%

The Downside

Release

Expected

Actual

Leading Indicators (MoM) (MAY)

0.8%

0.2%

Manufacturing Sales (MoM) (MAY)

-0.2%

-0.8%

Ivey Purchasing Manager Index s.a. (APR)

65.5

57.8

As businesses hold an improved outlook for the region and plan to increase hiring, the robust recovery in the labor market is likely to encourage household spending, and private sector consumption may gather pace throughout the second-half of the year as policy makers see a stronger recovery ahead. However, as the region faces a slowdown in the second-quarter, retail sales could turn lower during the three-months through June, and the central bank may show an increased willingness to support the economy as it aims to encourage a sustainable recovery. In turn, Governor Carney may continue to uphold his pledge to ‘carefully consider’ future rate hikes and speculation for a rate hike may subside should the central bank head see scope to keep the benchmark interest rate at 1.00% throughout 2011.

Potential Price Targets For The Release

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot031.gif, USD/CAD: Trading Canada’s Retail Sales Report

How To Trade This Event Risk

Forecasts for a drop in retail sales certainly reinforces a bearish outlook for the loonie, but an unexpected rise in consumption could pave the way for a long Canadian dollar trade as growth prospects improve. Therefore, if consumption increases by 0.1% or more in May, we will need a red, five-minute candle following the release to establish a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to lock-in our profits.

In contrast, the slowdown in economic activity certainly dampens the prospects for household spending, and a dismal sales report could spark a near-term reversal in the USD/CAD as the data impedes on the outlook for future growth. As a result, if spending slumps 0.3% or greater from the previous month, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Impact that the Canada Retail Sales report has had on CAD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2011

6/21/2011 12:30 GMT

0.4%

0.3%

-3

-45

April 2011 Canada Retail Sales

Household spending in Canada bounced back in April, with retail sales increased 0.3% after contracting a revised 0.1% in the previous month, but the data suggests we are seeing slowing recovery in the second-quarter as the central bank maintains a cautious outlook for the region. A deeper look at the report showed discretionary spending on clothing slipped 0.9% from the previous month, with spending on food and beverages slipping 0.1% lower, while demands for motor vehicle and parts advanced 0.3% during the same period. As the economic recovery cools, the Bank of Canada is widely expected to carry its wait-and-see approach into the second-half of the year, and Governor Mark Carney may continue to endorse his pledge to ‘carefully consider’ future rates as the fundamental outlook for the global economy remains clouded with high uncertainties. Currency traders showed a mixed reaction to the release as the data barely missed market expectations, but the USD/CAD certainly pushed lower throughout the North American trade as the exchange rate ended the day at 0.9708.

USDCAD_Trading_Canadas_Retail_Sales_Report_body_ScreenShot030.png, USD/CAD: Trading Canada’s Retail Sales Report

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com