Earlier this morning, Canadian retail sales were surprisingly weak, driving the loonie lower against the greenback. While losses in the CAD have been small, the 0.5% decline in spending was unexpected given the strength of the labor market and the improvement in demand on the wholesale level. Spending pretty much fell across the board in April with clothing and shoe stores experiencing the sharpest decline. Demand for discretionary items such as sports goods, hobby, books and music also fell while purchases of alcohol and healthcare items increased. Excluding autos, sales dropped 0.3 percent, which was slightly less than the headline number but motor vehicle and parts sales also contracted. For the Bank of Canada, the pullback in spending raises questions about their plans to tighten monetary policy. The BoC has been the only central bank talking about raising interest rates but with consumers cutting back on spending and the possibility of Europe’s debt crisis spreading, the BoC will need to rethink their plan to raise interest rates.
Meanwhile across the Atlantic, European currencies are trading lower across the board despite the continuous decline in 10 year Spanish bond yields. Weaker German PMI numbers raised concerns about the ability of the Eurozone’s largest nation to provide cover for the rest of the region. With manufacturing activity contracting and service sector activity grinding to a halt, Europe needs not only an economic union to fortify the region but also stimulus to promote growth. While Eurozone Finance Ministers are meeting behind closed doors to find a way to form a more integrated fiscal and monetary union, investors are once again growing concerned about their ability to end the crisis. With Moody’s expected to downgrade U.K. banks today, S&P expressing concern about the ability of Spain’s bank bailout to cure the country’s short term funding needs and the independent Spanish bank audit results due in a few hours, investors realize there is no easy way out of the crisis. We agree and continue to believe that any rally in the EUR/USD should be looked at as an opportunity to sell at higher levels.