Canada’s month-on-month retail sales rose by 1.1% in January. The forecast was 1.5%.
The result was 0.4 percentage points below expectations. It indicates retail sales growth was weaker than predicted for the month.
The January retail sales figure of 1.1% is a significant miss, showing that the Canadian consumer is tightening their spending more than we anticipated. This follows the weaker-than-expected housing start numbers we saw last month, painting a picture of a cooling economy. We should therefore adjust our strategies to account for a more sluggish economic environment in the coming months.
This data directly pressures the Canadian dollar, and we’ve already seen the loonie slip below 0.7200 against the US dollar this morning. A slowing domestic economy reduces the likelihood of any hawkish stance from the Bank of Canada. We should consider buying USD/CAD call options or CAD put options to position for further currency weakness.
The Bank of Canada’s path is now clearer, with the market pricing in a 50% chance of a rate cut by September, up from just 25% a month ago. This makes long positions in Canadian bond futures, such as the three-month BAX contracts, more appealing. We are essentially betting that the central bank will have to act to stimulate the economy sooner rather than later.
On the equity side, this consumer weakness is a direct threat to retailers and related sectors on the S&P/TSX Composite Index. The S&P/TSX Capped Consumer Discretionary Index is already lagging the broader market by 3% this quarter. Purchasing put options on this index or specific retail-focused ETFs provides a good hedge against potential earnings misses.
We saw a similar slowdown develop in the second half of 2025, where weakening consumer data preceded a period of increased market volatility. That experience suggests that even if the market doesn’t fall immediately, we can expect wider price swings. This makes it a good time to review our positions on implied volatility, perhaps by buying straddles on key indices.
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