Retail Sales (MoM) (AUG) (12:30 GMT; 08:30 ET)
Expected: 0.5%
Previous: -0.8%

Retail Sales Less Autos (MoM) (AUG) (12:30 GMT; 08:30 ET)
Expected: 0.3%
Previous: -0.3%

How Will The Markets React?

Canadian retail sales growth during the month of August is anticipated to improve after faltering during 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 5.9 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 given the Canadian dollar’s moves to parity with the US dollar, domestic producers will become increasingly dependent on Canadians to keep 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. The August retail sales release has the potential to disappoint, as wholesale sales plummeted 2.0 percent during the same period on the back of a drop in auto sales. Though the correlation is not perfect, large changes in the wholesale report are sometimes reflected as large changes in the retail group, creating the potential for a weaker-than-expected result on Tuesday that could finally help pull the Canadian dollar a bit lower.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bond futures continue to trek higher, similar to gains in US Treasuries, as both the Bank of Canada and Federal Reserve are widely perceived as being dovish (especially the US central bank). The Canadian contracts will likely remain a follower of their US counterparts, as CGBs have effectively ignored national economic data lately. Nevertheless, if volatility in the markets dies down in coming days, investors may pay heed to Tuesday’s retail sales report and signs of resilient consumption could lead CGBs to back off from resistance at 112.80 and 113.22. However, a surprisingly weak reading may only fuel more gains.

FX – USD/CAD

Declines in the USD/CAD have accelerated as the pair hit a new 31-year low of 0.9632 on Friday, as the pair remains stubbornly within a downtrend. With the greenback weak across the forex markets, gains for USD/CAD have been difficult to come by. Nevertheless, retail sales figures almost always have the potential to be market movers, and Tuesday’s Canadian release is no exception. Though the retail sales report is anticipated to improve, a sharp decline in wholesale sales creates downside risks for the August reading. Since auto sales were the main reason why the wholesale figure took a hit, the headline retail sales figure could be particular hard hit and the news could help give USD/CAD a boost towards 0.9700, as the central bank has already noted downside inflation risks. On the other hand, if retail sales prove to be stronger-than-estimated and oil takes on $90/bbl once again, USD/CAD could continue to march within its descending channel to target a break towards 0.9575.

Equities – S&P/TSX Composite Index

Canadian equities plummeted on Friday, following US equities lower, as the S&P/TSX Composite Index targeted the confluence of 100 SMA and Fibonacci support at 13,901/49. With a bearish MACD divergence appearing on the daily charts, additional sell-offs could be in store. While global stock market and risk aversion trends will likely play a large role in the performance of the S&P/TSX early in the week, traders should watch for the release of Canadian retail sales on Tuesday. Spending is anticipated to have picked up during the month of August, which would be bullish for the equity index. However, if the data proves to be disappointing on the back of soft auto sales, the S&P/TSX could make another reach lower for the 13,900 level.

Terri Belkas is a Currency Strategist at FXCM.