By DailyFX – In and of itself, the Canadian wholesales report has historically garnered little attention from financial markets. However, market participants, be they… … debt,
equity or currency traders, have come to see the release for what it truly is a leading indicator for the more closely watched retail sales number.

Though the value of wholesale sales soundly outpaces its retail counterpart, the latter
generates more interest as it is a direct reflection of consumer demand.
Nonetheless, setting the stage for tomorrows retail report, the sales report from
wholesalers slowed 1.6 percent in September, the biggest drop in two years.
Furthermore, the most influential changes in the wholesales report are expected to
filter through further down the supply chain. From the numerous declines on the
month, a 1.8 percent drop in food and beverage, 3.3 percent easing in machinery and
electrical equipment and 4.4 percent reduction in vehicle purchases are all likely
to find their way into a retail sector during the same month. Whats more, the
steady drop in gasoline prices through the month of September provides an additional
burden to the retail gauge. With all of these factors in mind, the various markets
responded to todays data. Both government debt yields and equities benchmarks
started off lower, but reversed quickly as market participants decided to wait for
the retail report the following day. From the Canadian dollar on the other hand, a
more exaggerated response suggested the market was caught off guard in its attempts
to price in the two sales reports.

Canadian 10-Year Bonds

Government bonds had the most staid session on the day as investors found little
value in the September wholesales report, deciding instead to defer a more confident
reaction to Tuesdays retail report. However, despite the lack of follow through,
the asset class produced the correct initial reaction to the massive 1.6 percent
drop in sales at the wholesale level. In the thirty minutes following the release,
the ten-year note rallied 13 basis points to the session high 100.12. From this
peak, the lack of macro-economic data left the bonds adrift as a lack of one-sided
momentum kept the price action between 99.97 and 100.09 for the duration of the
active session.

FX – USD/CAD

The Canadian dollar continued its recent weakness, losing significant ground against
its US namesake following the mornings bearish data. Though reactions in price
remained relatively muted in the moments that followed the release, a subsequent
spark in buying pressure sent the USDCAD pair significantly higher through morning
trade. Canadian dollar bears increased their Loonie-short positions in expectations
of a likewise poor Retail Sales data result at tomorrows New York open. With
wholesale sales a clear barometer of concurrent retail sales growth, it remains
relatively clear that we may see tomorrows data come in well-below previous
consensus estimates. In fact, this is precisely what occurred just two months ago
when Julys surprisingly poor wholesale sales report predicted a similar result in
the following days retail sales data. As such, risks for the USDCAD pair arguably
remain to the topside ahead of tomorrows news release. If the retail report shows
a larger than expected decline in domestic demand, we could see the USDCAD test the
psychologically significant 1.1500 mark through tomorrows trade.

Equities – S&P Toronto Stock Exchange 60 Index

Though they do not begin trade until 14:15 GMT (9:15 EDT), Canadian equities showed
a clearly negative result following the mornings wholesale sales report. The S&P
TSE 60 index a domestic analog to the US Dow Jones Industrial Average gapped
lower from Mondays close. Traders expressed disappointment with the economic
report by offering Canadian stocks lower ahead of the open. A subsequently bullish
reversal closed the gap in prices, but market analysts attributed the gains to
renewed Mergers and Acquisitions activity and not a shift in economic outlook. Given
the discontent with the bearish wholesale sales report, Canadian equities may look
to retrace todays gains if tomorrow’s retail sales show a similarly large drop.
Previous price action shows that the 60-stock index has experienced considerable
difficulty passing the psychologically significant 725 mark. Tomorrow will likely be
much of the same, as risks remain to the downside for Canadian equities and the
domestic currency alike.

Regards,

John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com

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