CAD Retail Sales (MoM) (DEC) (13:30 GMT; 08:30 EST)
Expected: 0.8%
Previous: 0.7%

Retail Sales Ex. Autos (MoM) (DEC) (13:30 GMT; 08:30 EST)
Expected: 0.4%
Previous: 1.7%

What Are The Markets Facing?

Consumer spending in Canada is expected to remain strong in December, as a Bloomberg News poll of economists reveals a consensus forecast for retail sales to rise 0.8 percent during the month. Excluding autos, sales are anticipated to gain a more tepid 0.4 percent. However, the actual reading could prove to be disappointing relative to economist estimates, as data released during the month of December was generally dismal. Indeed, Ivey PMI plummeted at the end of 2007 below the 50 boom/bust level to a six-year low of 45.9 while the net employment change unexpectedly showed a loss of 18,700 workers during the month. Furthermore, this week’s release of Canadian wholesale sales showed a surprising drop of 2.9 percent as auto manufacturers sold fewer cars than in any month since October 2006. While the decline in auto sales was blamed primarily on lackluster US demand, soft domestic purchases likely played a role in the drop as well. As a result, even if holiday spending manages to prop up consumption during the month, the headline retail sales figure will likely be weighed down quite a bit by the auto component. More importantly, disappointing retail sales will only serve to raise prospects for a March rate cut by the Bank of Canada, as the central bank has already started to follow the Federal Reserve’s lead with two 25bp rate cuts in December and January to nearly two year low of 4.00 percent.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bond futures remain heavy as global equities recover and traders become more risk seeking. Over the past few weeks, however, CGBs have not been able to break below support near 115.75, though the contract’s consolidation within a descending triangle suggests that more bearish declines may be on the way. If Friday’s Canadian retail sales report proves to be encouraging, the break lower could be triggered by the news as it would help cut back speculation of a rate cut by the Bank of Canada in the near-term. On the other hand, a disappointing spending report could lead to rise towards near-term resistance at 116.23, with sharp gains targeting 117.

FX – USD/CAD

USD/CAD has continued to consolidate between the 100 SMA and 200 SMA, though the pair has managed to remain contained to an ascending channel. However, as Technical Strategist Jamie Saettele recently noted in his Canadian Dollar Technical Outlook, USD/CAD could be setting up for a drop back towards trendline support, with sharp declines ultimately targeting 0.9755. The Canadian retails sales report will be released Friday and expectations call for a 0.8 percent increase in December, and if the figure improves in line with or more than expectations while oil continues to trade near record-highs, USD/CAD could plunge lower. However, given the spate of dismal economic reports released during that period, the news could be particularly disappointing. Furthermore, after cutting the Canadian benchmark interest rate by 25bps to 4 percent on January 22nd. Bank of Canada Governor Mark Carney recently signaled that the bank may lower the rate again on March 4 amidst concerns about slowing export demand to the US, which may be in or nearing a recession. As a result, Friday’s news could actually push USD/CAD up for another test of 1.02.

Equities – S&P/TSX Composite Index

The S&P/TSX Composite Index ran headlong into resistance near the 13,550/600 level (100 SMA, multiple fib retracement levels), as a surge in oil and gold prices sent commodity sector shares rocketing higher. However, the index may have trouble making it much higher given the formidable resistance presented at these levels, and as a result, a pull back towards 13,000 may be more likely in the near-term. Upcoming Canadian retail sales data could weigh shares down if they prove disappointing, as the markets remain concerned that the economy will suffer at the hands of a US slowdown, or worse, recession. On the other hand, a spending report in line with or better than expectations could prop up shares in the retail sector to help keep the S&P/TSX Index afloat.

Terri Belkas is a Currency Strategist at FXCM.