U.S. Dollar: Sales and Confidence Add To Signs Of Consumers’ Return

Last updated 12/11/2009 4:30 PM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: SALES AND CONFIDENCE ADD TO SIGNS OF CONSUMERS’ RETURN
• EUR/USD: LEADERS CAUTION A “WEAK RECOVERY IN 2010”
• GBP/USD: INFLATION MAY SOON PRESSURE BoE’s TARGET
• USD/CAD: FLAHERTY IS NOT CONCERNED WITH THE HOUSING BUBBLE
• AUD/USD: PATIENTLY AWAITING NEXT WEEK’S DATA
• NZD/USD: OIL DROPS FOR THE EIGHT CONSECUTIVE DAY, BELOW $70
• USD/JPY: A DOUBLE DIP RECESSION MAY BE IN SIGHT

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: SALES AND CONFIDENCE ADD TO SIGNS OF CONSUMERS’ RETURN

The dollar reigns supreme in today’s session, as all major counterparts weaken in response to very enthusiastic U.S. data. The fact that good U.S. data now means dollar strength has indicated a change of pace of its own. The greenback took the highest toll on the yen, which lost nearly 1.0% in today’s trading. Furthermore, the loonie and euro came out as some of today’s biggest losers, shedding 0.81% and 0.73%, respectively. Stock markets enjoyed today’s data, rising enough to negate losses from earlier in the week. The fact that the dollar and stocks are rising in tandem is another pattern that only recently has developed itself. Meanwhile, commodities suffered with gold losing 0.71% and oil falling 1.12%.

Retail Sales and Confidence Boost the Dollar

The two big reports of the day added to the notion that the consumer is finally starting to come around and may start to put their weight behind a more forceful economic recovery. Retail Sales more than doubled estimates, posting a 1.3% gain in the month of November. On an annual basis, sales showed their first gains since August 2008, while purchases excluding automobiles surged by the most since January. Sales were broad based, driven mostly by purchases of electronics and building materials. This was to be expected, considering the fact that spending on holiday related items during Black Friday and Cyber Monday were better than last year. However, we have to keep in mind that much of the sales frenzy was driven by deep discounts, which may eventually return to hurt retailers’ bottom-line. In addition, the one bit of disappointing news was that Retail Sales from the prior month was actually revised down from 1.4% to 1.1%. In a related report, the University of Michigan Index on Consumer Confidence rose from 67.4 to 73.4. The implications are obvious, with consumer spending accounting for about 70% of economic activity, the relative strength or weakness of the recovery firmly depends upon it. To some extent, these reports prove that last week’s report on payrolls was the first sign that the job markets have reached a turning point. As consumers become more at ease and convinced that their jobs are safe, their wallets are more likely to be open for business. Nevertheless, last week Bernanke described his skepticism about the health of the economy, citing that more sustained evidence is needed to support optimistic conclusions. It seems that Retail Sales and Consumer Confidence may be the first steps in fulfilling his wishes.

The Week to Come

A few other reports came out today, which showed that Business Inventories showed their first gain in 16-months, while exports were lifted to the highest in nearly a year. In addition, Import Prices were much higher than expectations, increasing by 1.70%. More in terms of inflation is on the way for next week with Producer and Consumer Prices on Tuesday and Wednesday, respectively. These inflationary readings come right before the Federal Reserve is expected to hold their FOMC meeting. At this point, it is hard to expect the Fed to make any hawkish moves as Bernanke, as recently as last week, reaffirmed his ‘extended period’ clause when asked how long rates will be kept at record low levels. Even when it comes to the flow of good data, Bernanke has remained unconvinced that the improvement is sustainable. Bernanke’s need for confirmation could push any move to unwind stimulus well into next year. Of course, any hope for a rate hike must be preceded by an exit strategy, one that has not yet been clarified or presented with any level of detail. Therefore, going into Wednesday’s meeting, it will be important to look for compelling evidence of an exit strategy plan. Overall, this is probably the most hawkish result that can be expected.

EUR/USD: LEADERS CAUTION A “WEAK RECOVERY IN 2010”

EUR/USD continues its correction on better-than-expected U.S. data. The euro has tumbled 1.6% in the last five days for the worst weekly performance since late-October. After a summit in Brussels, European Union leaders announced pretty dour forecasts, citing the need for European countries to maintain stimulus methods because they will face a “weak recovery in 2010.” Furthermore, they cautioned that the job market faces further downside. The commentary coming out of the meeting was decidedly pessimistic, a viewpoint that may stem from the recent credit rating concerns in Greece and Spain. Leaders pointed out that they want to see Greece solve their problems on their own, preventing a need for a collaborative bail-out of any kind. Meanwhile, Greek Prime Minister George Papandreou confirmed his intentions to reduce the nation’s debt, saying that “there is no possibility of a default.” The Prime Minister said that he is not interested in any gifts from the European Union. There has been no data reported today which paves the way for a busy week. On tap for Monday will be the Euro-zone Employment report which should provide a clue as to the future health of spending. Thereafter, on Tuesday we will receive the ZEW report on Economic Sentiment followed by the Advance Purchasing Managers’ Index and Euro-zone Consumer Price Index on Wednesday. To wrap things up, there will be the IFO Expectations report on Friday.

GBP/USD: INFLATION MAY SOON PRESSURE BoE’s TARGET

The past three days has seen the pound gain little ground. GBP/USD may be hesitant to decisively take direction, but sterling rallied for the second day against the euro. Producer Prices in the U.K. jumped at the fastest annual pace since March, and on a monthly basis have accelerated for the ninth straight month. Every component in the basket of goods used to track prices was stronger, with raw materials rising by the largest amount in more than a year. If this report serves as a bellwether for what’s to come, the Bank of England may have to revise their current inflationary projections. If inflation starts to creep up, the bank might have to exit quicker than they expected in order to keep prices contained. In a speech today, British Prime Minister Gordon Brown said that he believes they have “given more details than any other country” about what is being down to reduce the deficit. Brown remarks about the difficulties of balancing demands to revive growth and cut the deficit. Nevertheless, some critics believe that the Pre-Budget report of earlier this week did not have the substance necessary to actually halve the deficit. As for next week, the biggest piece of data to keep an eye on is the Consumer Price Index. Judging by the Producer Price index, consumer prices may have accelerated this month, thereby coming close to the bank’s longstanding inflation target of 2.0%. Anything higher would breach the BoE’s definition of price stability. Along with the Consumer Prices report on Tuesday will be Unemployment for Wednesday and Retail Sales for Thursday.

USD/CAD: FLAHERTY IS NOT CONCERNED WITH THE HOUSING BUBBLE

Outstanding U.S. economic data pushed all of the Comm-dollars lower against the greenback in tentative trading before next week’s filled schedule of economic releases. The prices of oil fell for the eight consecutive day breaking below $70 a barrel, its longest stretch of loses in six years. Economic data was almost non-existent, with merely Food Prices in New Zealand being released. Food Prices continued its downward trend for the fourth month in a row, dropping by 0.3% in November. Meanwhile, the Anglo-Saxon economies received an additional boost in confidence as the region’s leading player continued to report positive economic signs. Chinese Industrial Production increased, exports fell the least in over 13 months, and imports surged in November pointing to thriving conditions. China remains one of the biggest importers of Australian and New Zealand’s goods, and the two economies are enormous beneficiaries of thriving Chinese economy. Next week’s economic calendar will hit up for Australia as investors are patiently awaiting the releases of GDP, RBA Minutes and New Home Sales. New Zealand expects the releases of Housing Prices and Business Confidence. Meanwhile, Prices of New Houses in Canada rose fourth consecutive month as low interest rates and recovering economy spurred demand. Canadian Finance Minister Jim Flaherty stated that additional measures to avert housing bubble are not necessary as credit still remains “tight”. The rising debt loads still possess a problem for the recovering economy as households are more susceptible when interest rates rise.

USD/JPY: A DOUBLE DIP RECESSION MAY BE IN SIGHT

The Japanese Yen lost ground against all other major counterparts as economic conditions worsen within the world’s second largest economy. Severities of economic indicators continue to indicate that a double dip recession may emerge, while a deflationary spiral persists. Japan’s Consumer Sentiment dropped in November for the first time this year as weak labor market, depressed capital spending, and pay cuts are taking a bite out of confidence. Confidence dropped from 40.5 to 39.5, while the Cabinet Office lowered its assessment for the second month in the row to “weakening” conditions. According to Nikkei newspaper survey, employers are expected to cut bonuses by 14.8 percent to a 20-year low. A continuous loss of wages puts a strain on retailers to foster price cuts on goods, further exacerbating deflation. Meanwhile, the Minister for Financial Services Shizuka Kamei stated the economy may get worse if budget spending remains under ¥95 Trillion the next year. The comments point to the government’s willingness to spend its way out of a stagflationary period. Next week represents abundance of data to deliberate on the strength of current recovery in Japan. Most importantly, Tankan Survey will likely show a standstill in business confidence as the stronger Yen eroded competitiveness of Japan’s exports. Industrial Production, BoJ Interest Rate Decision, and Tertiary Index are among few to be released as well.

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for the upcoming Monday is EUR/USD. Monday will be a light day for economic releases with only Euro-zone’s Employment figures making an appearance at 10:00GMT or 5:00AM EST.

After a tremendous rally, the EUR/USD is arguably in retracement mode as it trades within the Sell Zone established through the Bollinger Bands. The pair continues to trade within an upward channel which originated in May. However, the signs are pointing further downward pressure for EUR/USD. The pair will likely to test the lower bound of the channel located at psychologically important 1.4500. The Sell Zone will be negated if the pair notches above 1 ^st Standard Deviation at 1.4775.

Comments (4)

Eddie09

December 17, 2009 at 10:46 PM ET

No problem, Nippon. One thing I've noticed is that the new Japanese government is moving toward more independent economically, politically and diplomatically from US policymakers. I believe this is an irreversible trend in the coming years, which would have a positive impact on Japan’s economy at the same time.

Best regards

Nippon

December 12, 2009 at 08:12 PM ET

Hi, I am Japanese and always look forward to your commentary, Kathy. USD/JPN MUST go way up for the sake of Japanese economy. Please don't pick on Japan any further.

Eddie09

December 13, 2009 at 01:28 PM ET

I think Kathy is making honest comments on forex issues rather than picking on certain country.

I also hope USD/JPY will move back up to a more reasonable exchange level and the Japanese economy will turn around in the not too distant future. And these are likely to happen.

Nippon

December 14, 2009 at 01:11 AM ET

You made my day, Eddie09. Thank you so much for your kind comment. I do hope you are right. Many thanks from Osaka, Japan.

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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.