Falling equity prices, as witnessed last week when the S&P 500 and the TSX lost roughly 6% of their value, and slumping commodity prices combined with rising interest rates are pushing up the volatility of G7 currencies. While the loonie has remained firm against most of its G7 peers, it has struggled in the past few weeks against the greenback, likely because of falling stock valuations. Canada did report strong retail sales for April, and early results for May also looked good, with much of the spending at gas stations. However, higher gas prices could put the brake on spending at the pump.

Scotiabank analysts and economists weigh in on how economic indicators and trends are influencing currencies, equities and retail sales right now.

Foreign Exchange

  • Rising interest rates, falling equity markets and sliding commodity prices have combined to lift Foreign Exchange market volatility considerably over the past few weeks. Outside of the early days of the pandemic in 2020, G7 currencies broadly are experiencing the highest implied volatility since 2016. The US Federal Reserve lifted its benchmark interest rate 75 basis points last week. The Bank of Canada is expected to raise its Overnight Target Rate by the same amount at its July policy decision after tightening policy 50 bps at the start of June. Other, major central banks are raising interest rates or, in the case of the European Central Bank, indicating that a tightening is imminent, as global inflationary pressures threaten economic and financial stability.
  • Tighter monetary policy generally is pushing up long-term interest rates; mortgage rates are rising and hot housing markets — such as Canada’s — are showing signs of cooling. Slower growth is needed to dampen price pressures and investors are rightly concerned that the blunt instrument of monetary policy may not be able to finesse an economic soft landing. Recession concerns are mounting consequently, adding to pressure on global equity markets.
  • The Canadian dollar (CAD) has struggled in the past couple of weeks, despite the Canadian economy continuing to rattle along at a healthy clip (trending a little below 4% seasonally adjusted annual rate (SAAR) in the second quarter, Scotia Economics Canadian GDP Nowcast suggests), commodities remain firm, if off recent peaks, and the Bank of Canada is at the vanguard of the global monetary policy adjustment. The US dollar (USD) rose rapidly from its early June low near 1.25 to retest its May high around 1.3077 late last week. We have been constructive on the outlook for the CAD — considering, strong growth, positive terms of trade and a hawkish central bank — but it has struggled against the USD, while remaining strong against the likes of the euro, pound and yen. The CAD’s performance against the USD correlates with US equity market trends. In fact, our studies show the CAD has one of the tightest positive correlations with the S&P 500 among the major currencies. When stocks go down, the CAD loses ground against the USD. We still feel the positive underlying fundamentals will lift the CAD in the coming months, but a rebound will, it seems, require the co-operation of equity markets and more positive trends might not emerge there until investors feel the end of the Fed’s tightening cycle is in sight.

 —  Shaun Osborne, Managing Director, Chief FX Strategist, and Juan Manuel Herrera, FX Strategist


  • Downside momentum extended. Last week was terrible for stocks, with the S&P 500 and TSX losing roughly 6% of their value. Following the steep selloff last week, the US benchmark is now trading 17% below its 200-day line. We must go back to March 2020 to witness such a deviation from that line, and such a departure from the moving average is rarely seen outside of recession. Moreover, the percentage of stocks in the S&P 500 making new 52-week lows surged to 43% last week, which is consistent with at least an intermediate low.
  •  The percentage of stocks making new lows reached 48% in Financials, 56% in Industrials and Technology, and 62% in Discretionary. There is no doubt that cyclical sectors are going through a tough stretch here. Again, the numbers suggest that the odds of a bounce are on the rise. Although the S&P 500 hit a new low last week, it was not corroborated by the Dow Transport-to-Utilities ratio, the Discretionary-to-Staples ratio (equal-weight), or the High Beta to Low Volatility stock ratio — as none made a new low.

— Hugo Ste-Marie, Director, Portfolio & Quantitative Strategy; Jean-Michel Gauthier, Associate Director, Portfolio & Quantitative Strategy


  • Canadian retail sales came in as expected in nominal terms, increasing 0.9% in April. Sales volumes surpassed expectations, despite strong increases in consumer prices in the month. Early data for May showed persistent strength in retail sales (+1.6% m/m), with higher prices likely boosting dollar receipts in part. The retail sales release bodes well for the overall growth in the second quarter of 2022, with the Canadian GDP growth estimate improving to +3.8% q/q, SAAR.
  •  The strength in retail sales in April was concentrated in a handful of sectors, driven by higher spending at gas stations (+3.0% m/m), general merchandise stores (+4.2% m/m) and miscellaneous retailers (+11.3% m/m). The main offset came from sharply lower sales of building materials and gardening equipment (-4.3% m/m), with lower renovation activity likely a result of the rapid cooling in the Canadian housing market. Sales at gas stations appear to have benefited from lower gas prices in April, which drove the volume of purchases up +5.4% m/m. Since then, gas prices have climbed on renewed tensions in the crude market in May, likely clipping sales growth at the pump.

— Nikita Perevalov, Director of Economic Forecasting


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