In July 2025, Canadian retail sales fell by 0.8%, missing the expected increase of 1.5%. The previously reported gain for the prior period was also downgraded from 1.5%. When excluding automobiles, sales dropped by 1.2%, compared to the expected decline of 0.7%. The prior figure had shown a rise of 1.9%. Sales fell in eight out of nine subsectors, highlighting widespread struggles in retail.

Advance August Data

Advance data for August indicates a 1.0% growth in retail sales. However, RBC cardholder data reflected a 2.2% drop in overall sales, while core sales increased by 0.4%. Details reveal a slight gain of 0.2% at motor vehicle and parts dealers in July. The food and beverage sector saw a 1.3% decline, with supermarkets experiencing a significant 2.5% drop. Clothing sales also fell by 3.2%. Statistics Canada provided an upbeat advance reading of a 1.0% increase. Some North American retailers are seeing Canadian consumers remaining strong, which contrasts with trends in the USA. The unexpected drop in July retail sales suggests that Canadian consumers are weaker than previously thought. This raises questions about the health of our economy and casts doubt on the strength of Q3 growth. The drop in nearly every category indicates a broad weakness.

Bank of Canada’s Response

This report gives the Bank of Canada a strong reason to hold its current stance and adopt a gentler approach. Following the August CPI data that showed core inflation easing to 2.9%, the disappointing consumer spending figures lessen the need for any further interest rate hikes. We may see overnight index swaps adjust, reducing the chances of another hike in 2025 while increasing the probability of rate cuts in early 2026. For the Canadian dollar, July’s poor performance mixed with the strong August estimate creates significant uncertainty. This situation sets the stage for more volatility in the USD/CAD pair, which has been trading around 1.3700. Options traders should brace for a breakout, as implied volatility is likely to rise while the market assesses whether July was an outlier or the start of a trend. A similar situation of conflicting data happened in late 2023, leading to a spike in volatility before the Bank of Canada confirmed a pause on rate hikes. Given the extent of the July miss, traders might want to consider buying downside protection for the loonie, such as calls on USD/CAD, to guard against the August advance number being overly optimistic when the final report is released next month. This slowdown also negatively affects Canadian stocks, especially those focused on consumers and the banks financing them. Weakness in supermarket and clothing sales directly impacts the retail sector, making it likely that there will be increased interest in buying puts on the S&P/TSX 60 Index to protect against a broader economic downturn. Create your live VT Markets account and start trading now.

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