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 to the tune of 60 percent, 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 consumption performed so well in the first half of 2007. If the overall export economy is to falter as a result of the Canadian dollar’s move to parity with the US Dollar, domestic producers will become increasingly dependent on Canadians to keep overall production levels more or less constant. The August retail sales release could be quite disappointing, 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 help continue to pull the Canadian dollar lower. On the other hand, if the data proves to signal a far more sanguine view of the economy, USD/CAD could resume its descent while equities could continue to climb.

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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, investors may pay heed to Tuesday’s retail sales report and signs of resilient consumption could lead CGBs to back off from resistance at 113.22. However, a surprisingly weak reading may only fuel more gains.

FX – USD/CAD

A bounce in the US Dollar throughout the forex markets led USD/CAD to test trendline resistance on Monday after the pair a fresh 31-year low of 0.9632 on Friday. Nevertheless, USD/CAD remains stubbornly within a downtrend, and with the greenback likely to remain relatively weak, gains for USD/CAD may be 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 tumble as well and the news could help give USD/CAD a boost back above 0.9800, 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 the lows near 0.9600 once again.

Equities – S&P/TSX Composite Index

Canadian equities plummeted on Monday morning, following US equities lower, as the S&P/TSX Composite Index targeted the confluence of 100 SMA and Fibonacci support at 13,901/49. However, the equtity index barely managed to eke out a gain for the day, closing up 41.94 points at 14,043.60. While global stock market and risk aversion trends will likely continue to play a large role in the performance of the S&P/TSX throughout 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.