Currencies Choke Up Gains After Retail Sales and PPI

Last updated 7/14/2009 8:54 AM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

At first glance, the retail sales and producer price reports were much better than expected.  However, a closer look at both reports indicates that the improvements in consumer spending and inflation was not driven by a material increase in real activity.  weakness beneath the headlines caused the dollar to erase its initial gains against the Yen and to strengthen against the euro and British pound.  The reversal of the knee jerk reaction by forex traders indicates that the U.S. reports created more cause for concern than relief. The primary reason why both reports beat expectations was due to the 10 percent increase in oil prices last month and unfortunately higher energy prices hurt more than they help the U.S. consumer.  Therefore as we warned in our retail sales preview on Monday, the latest consumer spending reports spells trouble for the currency market.  Even the stronger earnings report from Goldman Sachs may not be enough to reverse market sentiment.  The rally in the EUR/USD can only continue if we get solid earnings from other banks and companies like Intel. 

Retail sales rose 0.6 percent in the month of June, the strongest pace of growth since January.  However the increase in overall consumer spending masked underlying weakness with sales of core goods which excludes sales of cars rose only 0.3 percent (the sale of cars can be sensitive to discounts by dealers). The unseasonably cool weather in the Northeast left spending on clothing unchanged and unsurprisingly the biggest contributor to consumer spending was gas station receipts.  The national average for gallon of gasoline hit a high above $2.67 last month compared to a current price of $2.50. 

In June, Producer prices also rose by the strongest level since November 2007 with the annualized pace of PPI growth rising from -5.0 to -4.6 percent. Yet once again, core prices saw a far more modest rise.  On a monthly basis, core prices rose only 0.5 percent, less than a third of headline price growth.  The annualized pace of core growth rose from 3.0 to 3.3 percent.  Overall, the higher producer prices was driven almost entirely by higher energy prices.

Comments (2)

Shaun

July 14, 2009 at 05:47 PM ET

Kathy,

You wrote" weakness beneath the headlines caused the dollar to erase its initial gains against the Yen and to strengthen against the euro and British pound".
Would you explain why WEAK dollar strengthen against the euro and pound?.

klien

July 15, 2009 at 09:05 AM ET

The dollar has been the beneficiary of safe haven flows and uncertainty since June. I know its confusing, but weak dollar has been dollar positive while strong data has been dollar negative

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.