Canada’s retail sales excluding motor vehicles rose by 0.8% month on month in January. The forecast was 1.2%.
The outcome was 0.4 percentage points below expectations. The report refers to the month-on-month change for January.
We see that the January retail sales miss was an early signal of a cooling consumer. This trend appears to be continuing, as February’s inflation data released last week also came in softer than expected at 2.6%. The most recent jobs report also showed the unemployment rate ticking up slightly to 6.2%, reinforcing this view of a slowing economy.
This data stream shifts our focus toward the Bank of Canada’s next move. The probability of an interest rate cut before the summer is now increasing, a change from the sentiment we held at the start of the year. Traders are looking at derivatives tied to the Bank of Canada’s overnight rate to position for a more dovish policy stance in the coming months.
Consequently, the Canadian dollar is facing headwinds. The prospect of lower interest rates relative to the U.S. has helped push the USD/CAD exchange rate above the 1.3700 level. We are considering buying call options on USD/CAD as a way to capitalize on potential further weakness in our currency.
This consumer slowdown is also a concern for Canadian stocks. We are cautious on the S&P/TSX 60, especially in consumer discretionary sectors. Buying protective put options on broad market index ETFs could be a prudent way to hedge against a potential downturn.
Looking back, we saw a similar pattern in the fall of 2025 when early signs of slowing growth emerged. Back then, implied volatility on currency options remained low before reacting sharply to central bank comments. This suggests that positioning for higher volatility in the Canadian dollar may be a worthwhile strategy now.
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