In May, Canada’s retail sales fell by 1.1%, matching expectations. This drop came after a revised increase of 0.4%, up from an earlier 0.3%. When we exclude auto sales, the monthly decline was 0.2%, slightly better than the expected 0.3% drop. Early reports for June indicate a strong recovery, with a 1.6% rise in sales.

Retail Sales Growth

Year-over-year, retail sales grew by 4.9%, just below last month’s 5.0%. In May, 32% of retail businesses reported challenges from trade tensions between Canada and the U.S., down from 36% in April. Many faced price increases, changes in product demand, and rising costs for raw materials, shipping, and labor. The 1.1% drop in May was widely anticipated and is now considered old news. Our focus should shift to the positive advance estimate for June, which shows a robust 1.6% rebound. This suggests that consumer spending is stronger than the recent headline figures may suggest.

Canadian Dollar Outlook

The expected increase in spending and reduced business worries about trade enhance the outlook for the Canadian dollar. We view this as an opportunity to anticipate a lower USD/CAD exchange rate in the coming weeks. Historically, when domestic data is unexpectedly strong, it has boosted currency performance. Increased activity may lead the Bank of Canada to be cautious about cutting interest rates further. With annual inflation holding steady at 2.9% in May, policymakers must remain vigilant. We expect short-term interest rates to stay high, as the case for aggressive cuts has weakened significantly. A strong consumer positively impacts Canadian corporate earnings, creating a good environment for the stock market. We see potential gains in the S&P/TSX 60 index, especially among consumer discretionary stocks that thrive on increased spending. This data supports a more optimistic approach through index futures or call options. The market often reacts strongly to past data, and we think this is one such case. The story is shifting from a weak May to a strong June, which hasn’t yet been fully reflected in asset values. This gap offers a chance to act before the stronger economic reality becomes widely accepted. Create your live VT Markets account and start trading now.

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