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Dollar Hit by Retail Sales and Empire State

Last updated 11/16/2009 8:51 AM ET (GMT -5) 8 Comments

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Kathy Lien

Director of Currency Research, GFT

Weakness beneath the headlines is the story behind this morning's U.S. economic reports and the reason why the dollar is not responding to the pick up in consumer spending. Retail sales increased 1.4 percent in the month of October, but excluding autos, sales grew by only 0.2 percent, half the pace of the previous month.  Car purchases single handedly drove up spending. Even though Americans ate out more and bought clothing and general merchandise, the increase in discretionary spending was modest.  Instead, we saw a large drop in spending on building materials, electronics, sporting goods and furniture. The September data was also revised down materially (from -1.5 to -2.3 percent for advance retail sales) and discounts the optimism in the headline release.

The good thing is that spending is increasing and not decreasing but besides that, the guts of the report are weak. The stronger results reported by individual clothing retailers earlier this month appears to be reflected in the headline release, but the details suggest the sector as a whole is still suffering. Looking ahead the big question is whether consumers will deliver during the last 2 months of the year.  Retailers started to promote holiday shopping before Halloween and every year they seem to be sending out their holiday brochures earlier and earlier.  If it was up to retailers, we would be celebrating Christmas in the beginning of November.  Given the sentiment in America and the forecasts by retailers, we do not believe that consumers will come through over the next 6 weeks.

The Empire State Manufacturing Survey also fell short of expectations with the index falling from its 5 year high of 34.57 to 23.51.  As one of the first manufacturing sector releases for November, it certainly paints an ugly picture.  However unlike the retail sales report, the underlying components of the manufacturing sector survey provide some relief.  Half of the components are still in positive territory and most importantly, the outlook component increased from 55.69 to 57 which means that manufacturers in the NY region believe that business conditions will still improve 6 months from now.  

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Comments (8)

Stephan Smith

November 16, 2009 at 09:21 AM ET

So it looks like the EUR/USD may hover around $1.48 - $1.50 until the end of the year. Sales may be the determining factor, but something tells me that sales this holiday season won't be that great this year. We shall see.

FXDragon

November 16, 2009 at 10:50 AM ET

Im expecting a burst in eurusd before christmas on its way up to 53. I feel sentiment is cooking. It shall be delicious Turkey;)

koolraul

November 16, 2009 at 09:25 AM ET

Hi Kathy,
It seemed that car sales became the driver in consumer spending this past month. As the cash for clunkers have been extended, do you anticipate the same scenario for the month of November? Retailers seem to be suffering as well. With that said, do you think the rally in equities can continue as well as with the risk FX? Since consumers spending is really not picking up, would that be bearish in equities and the same time bullish for USD as high risk FX start consider risk aversion rather than risk apetite?

Thanks and best regards.

klien

November 16, 2009 at 09:29 AM ET

We should hear what Bernanke has to say first. The clunkers program was not extended. "However, the rise in auto sales in October indicates that the clunkers subsidy didn't capture all of the pent-up demand for this year. Consumers are willing to buy." Therefore I do not expect the same scenario to be repeated next month. As for how currencies could trade. I am long term dollar bearish

koolraul

November 16, 2009 at 09:56 AM ET

Thanks Kathy. I'm long term USD bearish as well and been buying on dips in AUD/USD.

FXDragon

November 16, 2009 at 10:44 AM ET

Kathy,
In a scenario where fed started raising rates, all other things being equal, would you expect a long term pullback in stocks?
or a temporary pullback first followed by more risk appetitte?

Sincerely,

jet

November 16, 2009 at 11:14 AM ET

The ratio of long to short positions in the EURUSD stands at -1.39 as nearly 58% of traders are short. Yesterday, the ratio was at -1.70 as 63% of open positions were short. In detail, long positions are 15.9% higher than yesterday and 12.4% stronger since last week. Short positions are 5.1% lower than yesterday and 4.6% stronger since last week. Open interest is 2.7% stronger than yesterday and 6.0% above its monthly average. The sharp shift towards Euro long positions (US Dollar shorts) signals that this may be the start of a sharper EURUSD pullback. ;) we'll see who eats the turkey lol

FXDragon

November 16, 2009 at 12:02 PM ET

But timing is half of trading so i'll be seriously going long beginning of Dec. Bon appetit!

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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.