Don’t Trade the Canadian Retail Sales Report Without Reading This

First of all, lemme give you the lowdown on the Canadian retail sales report. After all, you shouldn’t be trading a news report when you don’t know what the figures represent right?

The retail sales report measures the total amount of sales at the retail level and in effect, is reflective of consumer spending. Statistics Canada surveys retailers, collects the data, and releases a report every month to show month-on-month sales growth. They actually release two versions of the report: one that covers total retail sales, and another core version, which excludes automobile sales.

The reason why economists and traders pay close attention to the report is because consumer spending accounts for over 50% of Canada’s nominal GDP. If retail sales were to suffer, chances are that the Canadian economy would follow suit.

It also serves as a barometer of consumer confidence as rising sales normally reflect increasing confidence in the economy. Why would anyone spend his hard-earned Loonies if he thought the economy was going up in flames?

Now here’s what you need to know about tomorrow’s report, which is scheduled for release at 12:30 pm GMT.

Expectations are that headline retail sales rose by 0.2% in June, down from the 0.3% increase in May. Meanwhile, core retail sales are expected to rise by 0.4%, which is lower than the 0.5% surge experienced in the previous month.

Keep in mind that retail sales has been relatively weak so far in 2012, having only posted three month-on-month gains the whole year. On the other hand, core retail sales have come in worse than expected 5 out of the 7 releases this year.

But before you decide to bank on strong Canadian spending data, here are some words of caution.

Recall that BOC Governor Mark Carney has been unbelievably chipper lately, as he highlighted at the last BOC interest rate statement that Canada has been doing better than expected. He even mentioned that “some withdrawal of monetary stimulus” might be necessary and that the central bank might actually consider hiking rates if the Canadian economy can sustain its growth.

Now I’m not quite sure which figures Carney is looking at or if he needs to get his eyes checked because there seems to be a HUGE discrepancy between the BOC’s upbeat tone and recent economic data.

For one thing, the latest Canadian employment data turned out to be a big shocker as it printed its first negative number in five months. It turns out that 30,400 jobs were shed in July mostly because of the 51,600 drop in part-time jobs, which offset the 21,300 increase in full-time hiring.

Aside from casting a shadow of doubt on the BOC’s optimistic outlook, the net downturn in hiring for July might also translate in weaker spending as consumers probably decided to keep their hands in their pockets for the meantime.

When trading the Canadian retail sales report, keep in mind that like Huck’s attempts at cooking, it has a strong tendency to disappoint. (Peace, Huck! You know it to be true!) In fact, retail sales growth came in worse than expected 4 out of the last 5 times.

USD/CAD June 21, 2012

USD/CAD July 24, 2012

Also, there appears to be a strong positive correlation between price action and the report’s results. In layman’s terms, what this means is that when the results are bad, it often leads to a Canadian dollar sell-off (USD/CAD rally). And the opposite is true for when the results are good.

Another notable tendency, as you can see from the charts above, is how the market usually moves almost entirely in one direction throughout the entire New York session. What this implies is that the retail sales report has the ability to dictate price action on USD/CAD for the remainder of the day.

Of course, in no way am I saying that this is exactly how the market will act when Canada publishes its latest retail stats tomorrow. In fact, I’m not even saying that you should trade this report at all; trading the news entails quite a bit of event risk and it isn’t for everybody.

All I’m saying is that if you do decide to trade this report, you should look back at how the market reacted to it in the past and take note of its tendencies because it could give you a pretty good idea of what to expect.

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