What Are The Markets Facing?

The release of Canadian consumer spending data is likely to add to evidence suggesting that the Bank of Canada will leave rates unchanged going forward, and may even consider raising rates. Canadian retail sales are anticipated to jump 0.6 percent during the month of April, suggesting that consumption remains strong and will be a positive contributor to Q2 GDP. Indeed, we saw that Canadian wholesale sales during the same period – a good leading indicator for the headline retail sales reading – surged 1.4 percent on the back of purchases of personal goods, like apparel and pharmaceuticals, and electronics. However, there are downside risks for this retail sales report as well. During the month of April, gasoline prices rocketed higher and the unemployment rate ticked higher to 4.1 percent from 4.0 percent. Nevertheless, the odds are in favor of a strong Canadian retail sales report, which will only serve as a reminder of the Bank of Canada’s surprise decision to leave rates steady at 3.00 percent on June 10, when they called rates “appropriately accommodative”. Furthermore, the Bank’s tone turned increasingly hawkish as they said, “the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside,” and if “current levels of energy prices persist, total CPI inflation will rise above 3 percent later this year.” Clearly, the Bank of Canada’s inflation concerns are well warranted, and there is some potential that they will consider a rate hike later in the year. In fact, in 2004, the Bank of Canada cut rates three time between January and April, only to turn around and start raising rates in September. As a central bank that has changed the course of monetary policy rather quickly in the past, it is obvious that the threat of a rate hike later this year is very real.

Bonds – 10-Year Canadian Government Bond Futures

Canadian government bonds have been steadily rising toward 117 over the past week or so, but if April retail sales can put forth evidence that the consumer may be able to sustain the Canadian economy, the contract could tumble below near-term support at 116.50 toward 116. Anything less than expected, however, may give traders all the evidence they need to start pricing in another rate cut and CGBs could target 117 once again.

FX – USD/CAD

USD/CAD continues to consolidate within a wide range of 0.9850 – 1.0350, but over the course of the past week, the pair has shown hesitance to break below near-term support at 1.0150. Nevertheless, according to Technical Strategist Jamie Saettele, the odds are in favor of a USD/CAD decline below 1.00 in the near-term (see his Daily Technical Report for more). Will upcoming Canadian event risk work in favor of this scenario? Possibly, as Canadian retail sales are expected to rebound upon release. This news would be coming on the tails of stronger-than-expected Canadian inflation data on Thursday, and would exacerbate concerns that a hawkish Bank of Canada may consider raising rates at some point this year. As a result, there is some potential that we could see USD/CAD break below near-term support at 1.0150 to target the 100 SMA at 1.0061, though sharp decline could take aim on parity. On the other hand, softer-than-expected retail sales could propel USD/CAD higher, as the data would suggest that conditions in the Canadian economy are far from buoyant.

Equities – S&P/TSX Composite Index

While most global stock markets have tumbled over the past few weeks, Canadian equities have held up as energy shares propel the S&P/TSX Composite Index higher. However, resistance at 15,100 proved solid as a drop in oil prices on Thursday weighed in the index down. Upcoming event risk includes the release of Canadian retail sales, which is expected to reflect a pick up in consumption. If the index rises in line with expectations, the S&P/TSX could recoup some of Thursday’s losses. On the other hand, weaker-than-expected retail sales could send Canadian shares dipping lower to test trendline support at 14,600.

Terri Belkas is a Currency Strategist at FXCM.