USD/CAD: Trading the Canadian Retail Sales Report

Private-sector spending in Canada rose for the first time in four-months, and marked the biggest increase since July 2006 as retail sales jumped 1.9% in January. The breakdown of the report showed that auto-related purchases increased 3.8% from the previous month, while discretionary spending on clothing and accessories rose 3.0% however, households are likely to cut back on consumption throughout the year as the region faces its first recession in over a decade. As a result, the Bank of Canada took further steps to stimulate the ailing economy and lowered the benchmark interest rate to a record-low of 0.50% earlier this month, and the extraordinary efforts should help to stem the downside risks for growth and inflation but nevertheless, as the downturn in the global economy intensifies, growth prospects are likely to deteriorate further as trade conditions falter.

Retail sales in Canada plunged 5.4% in December to mark its biggest decline since January 1991, and conditions are likely to get worse as the world’s eighth largest economy heads into a deepening recession. The breakdown of the report showed that gasoline receipts slipped another 11.7% after falling 15.1% in the previous month, while demands for building supplies fell 5.6% during the month, and was followed by a 3.7% drop in clothing sales. The data continues to reinforce a dour outlook for growth as households face a weakening labor market paired increased turmoil in the banking sector, and as a result, the Bank of Canada is widely expected to lower the benchmark interest rate by 50bp to a record low of 0.50% in an effort to jump-start the economy and may adopt unconventional policy tools to counter the recession as borrowing costs fall close to zero.