-CAD slips as June retail slide counters NAFTA optimism.

-June retail sales decline after blowout May numbers.

-Mexico's NAFTA progress brings a new deal one step closer.

© Pavel Ignatov, Adobe Stock

The Canadian Dollar slipped during the noon session Wednesday as traders responded to a steeper-than-expected decline in retail sales during June, which has countered optimism over a Politico report that US and Mexican officials are preparing to set out the bones of a new North American Free Trade Agreement (NAFTA) Thursday.

Canadian retail sales fell by -0.2% during June which, marking a reversal from the blowout and upwardly-revised 2.2% gain seen back in May, was a fraction greater than the -0.1% fall many economists had been looking for.

Core retail sales, which remove car sales from the data set because of their distortive impact on underlying trends, fell by -0.1% after a bumper 1.4% gain in May. This was in line with expectations.

A fall in sales of gasoline, cars and motorvehicle parts more than offset increases in food, beverages, building materials and gardening equipment sales during June, leading the total value of retail sales measured by Statistics Canada to fall.

"Shoppers weren't in much of a spending mood in June," says Royce Mendes, an economist at Toronto-headquartered CIBC Capital Markets. "That, however, does come after a particularly strong May reading which was revised two ticks higher to 2.2% on the headline. The on consensus reading will leave GDP still tracking flat for the month and roughly 3% for the quarter, and as result won't do much to settle the debate between a September or October hike from the Bank of Canada."

Analysts including those at CIBC say the second quarter GDP report due at the end of August is the most important data point set to be released for the Canadian Dollar over coming weeks.

Should annualised Canadian GDP growth come in above 2.8%, which is the Bank of Canada forecast, then it could see the central bank raise interest rates in September rather than October.

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in rates and also provide insight into market expectations for monetary policy, implies a September 05 cash rate of 1.55% and an October 24 cash rate of 1.74%.

Another 25 basis point rate hike would put Canada's cash rate at 1.75% so the current gap between the market implied rate suggests traders overwhelmingly favour of an October, rather than September, rate hike.

"Given lingering speculation of another possible back-to-back hike in September and last week's headline CPI surprise (which should be faded), activity data will be instrumental for the CAD and the rates space," says Mark McCormick, North American head of FX strategy at Toronto-headquartered TD Securities. "We note that the current setup differs from last year where the economy had followed significant strength with Q1/Q2 growth of 3.7% and 4.5%."

McCormick warns against any hopes of two interest rate rises coming from the Bank of Canada over September and October, which would rerun the BoC's 2017 playbook, saying Canada's economy hasn't been hot enough to warrant it this year. The TD team says a single rate rise will come in October.

They advocate that clients of the bank bet against the Canadian Dollar during the weeks ahead, although they say the risk and reward balance is most attractive for those selling the Loonie against currencies other than the US Dollar because the greenback itself is likely to weaken before October comes around.

Wednesday's retail sales data comes hard on the heels of a Politico report suggesting US and Mexican officials are preparing to set out the bones of a new North American Free Trade Agreement Thursday following more than a year of negotiations.

This is significant for the Canadian Dollar because it increases the odds of the NAFTA deal being saved, which is important because analysts have previously estimated that a US withdrawal from the pact would send the Loonie some 20% lower. Officials have been attempting to rengotiate the deal under threat of a US withdrawal ever since the middle of 2017.

"Even if the US and Mexico manage to overcome the bilateral differences this would make an agreement in the NAFTA negotiations more likely but it would be far from wrapped up. And time is fleeting. The mid-term elections in the US are going to be held in November and on 1st December the new President Andrés Manuel López Obrador will take office in Mexico, even if he had recently seemed constructive regarding the NAFTA negotiations. We remain cautious, as NAFTA optimism has turned out to be premature all too often in the past," says Commerzbank's Reichelt.

The USD/CAD rate was quoted 0.11% lower at 1.3020 after the release but is u 3.5% in 2018. The Pound-to-Canadian-Dollar rate was 0.09% higher at 1.6840 after reversing an earlier 0.05% loss, but is down 0.58% this year.

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