Retail Sales (MoM) (MAY) (12:30 GMT; 08:30 ET)
Expected: 0.6%
Previous: 0.4%

Retail Sales Ex. Autos (MoM) (MAY) (12:30 GMT; 08:30 ET)
Expected: 0.5%
Previous: 0.0%

How Will The Markets React?

Retail sales growth in Canada is anticipated to rebound during the month of May, with the headline reading estimated to rise 0.5 percent after improving 0.4 percent during the month prior. Meanwhile, retail sales excluding automobiles are forecasted to jump 0.6 percent following an unchanged reading the month prior. If the indicators continue to show a pick up in consumption, the data would bode well for GDP figures in the second quarter. Furthermore, the actual release could prove to be stronger than estimated after wholesale sales for the same period – a fairly reliable leading indicator – rose 0.6 percent against estimates of a 0.5 percent gain, helping to reverse a whopping 3.0 percent drop the month prior. Nevertheless, market reaction to this particular piece of data may only be short lived as the Bank of Canada has made it clear that after their July 10th hike to 4.50 percent, another round of policy tightening will not be on the agenda for some time, especially after June inflation pressures eased.

Bonds – 10-Year Canadian Government Bond Futures

While 10-year Canadian Government Bond futures have made decent bullish headway since the beginning of the month, substantial resistance near 111.00 could limit gains. Furthermore, Monday’s retail sales report could lead CGB’s lower, as the figure has the potential to prove to be bullish for the economy. On the other hand, figures that miss expectations may actually push prices higher as the Bank of Canada has already started to take a less hawkish stance, and softer consumption would only further that sentiment.

FX – USD/CAD

Similar to many other currency pairs, the USD/CAD has maintained relatively thin ranges over the past week or so, though we did see a large spike higher on Friday to test 1.0500 as the commodity dollar suffered across the board. However, the release of retail sales on Monday could send USD/CAD down towards support as the indicator is anticipated to improve from the month prior. Signs that consumption remains resilient could leave the Bank of Canada concerned that spare capacity will only become more limited and provide additional upside risks for inflation. Declines for USD/CAD are not likely to push below strong support at the 1.0400/15 level on the retail sales report alone, thus, fresh highs for the Loonie may be unlikely on Monday. On the other hand, a weaker-than-expected reading could help send USD/CAD rocketing towards 1.0600, especially as traders desperately search for a bottom in the pair.

Equities – S&P/TSX Composite Index

Canadian equities fell from a record on Friday after US company profits missed estimates, signaling that slower US economic growth that may crimp demand for Canadian commodities. The S&P/TSX Composite Index was down 0.2 percent to 14,596.44 at 1:57 p.m. in Toronto as a 19 percent plunge in Biovail Corp. shares to C$21.54 led declines after regulators rejected the drugmaker's application for approval of an antidepressant. Meanwhile, natural gas prices dropped 4 percent to $6.44 in New York, pushing down shares of energy producers. EnCana Corp., Canada's largest natural-gas producer, dropped 23 cents to C$67.25 while Nexen Inc., an oil and natural-gas company, slipped 26 cents to C$35.59.

Despite Friday’s losses, Canadian equities have shown a clear uptrend since late June. While an improvement in retail sales on Monday could underpin further gains for the S&P/TSX, additional signs that the US economy is slowing further could lead the benchmark index down to the 14,500 level. Multiple indicators out of the US are estimated to signal bearish tones for expansion, with the biggest event risk coming next Friday when Q2 GDP will be released. As a result, equity traders should keep an eye on fundamental data from both the US and Canada since the economies are so tightly intertwined.

Terri Belkas is a Currency Strategist at FXCM.