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U.S. Dollar: Retail Sales Could Provide Hope

Last updated 1/14/2010 5:26 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: RETAIL SALES COULD PROVIDE HOPE
• EUR/USD: TRICHET RELUCTANT TO RAISE RATES
• GBP/USD: EXTENDS GAINS AGAINST EURO
• AUD/USD: RALLIES ON STRONG LABOR MARKET NUMBERS
• USD/CAD: OIL DOWN, GOLD UP
• NZD/USD: CREDIT CARD SPENDING
• USD/JPY: TRAILING US YIELDS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: RETAIL SALES COULD PROVIDE HOPE

Given the big surprise in the U.S. retail sales report, we would have expected a more dramatic reaction in the U.S. dollar.  The greenback sold off against the most of the major currencies but still managed to end the day higher against the euro and Swiss Franc.  Whenever it comes to trading U.S. data, the most logical reaction to the economic report tends to be in USD/JPY and today was no exception.  Thirty minutes after the retail sales report was released, USD/JPY fell over 60 pips and by noontime in NY and the London close, the currency pair was down close to 100 pips from its prerelease levels. The reaction in the EUR/USD on the other hand was rather muted considering that ECB President Trichet delivered his press conference minutes after the number.  Cautious comments from the central bank head tempered the slide in the dollar and left the EUR/USD basically unchanged on the day.  There has been a lot of confusion about how consumer spending could have been so weak when everyone was reporting strong holiday sales.   However unless there is a logical explanation that suggests that the drop off in spending was distorted, there should be a lasting impact on the dollar.  

Risk Appetite Not Entirely Damaged

However based upon the rally in equities, the lack of reaction in gold, and the relatively small daily change in the dollar, risk appetite was not entirely damaged by the weak retail sales report.  The price action in the financial markets suggests that investors want to be optimistic and believe that brighter times lie ahead in 2010.  As a result, they are looking for silver linings and they have found it in the comfort of the knowledge that the weaker consumer spending report will keep monetary policy easy for a longer period of time and in turn, provide greater support for the U.S. recovery.  Also, with the upward revision to the November number, consumer spending will contribute positively to GDP growth in the fourth quarter.  Therefore stocks have rallied on the prospect that tighter monetary policy will not be delivered anytime soon and as long as stocks are rallying.  The rally in stocks also suggests that the data was not weak enough to prompt traders to rush into the safety of U.S. dollars on the fear that if the U.S. economy is not recovering, the rest of the world will not grow as well – this is less true nowadays with China leading the recovery.  This afternoon earnings from Intel are due for release and given the upbeat outlook from the company, earnings are expected to be strong which could offset some of the negative sentiment from today’s reports.  

Consumer Spending Contracts During Holiday Shopping Season

Weak consumer spending coupled with the disappointing labor market numbers last week guarantee almost no action by the Federal Reserve before the summer. Given the reports of more consumers in the stores, we have to believe the drop in retail sales came from deep discounting. Consumer spending contracted by 0.3 percent in December and excluding auto purchases sales fell 0.2 percent. Based upon these numbers, the strong holiday shopping reports that we have heard from retailers appear to be a fallacy even though the November figures were revised higher. A closer look at the data reveals that demand for electronics, general merchandise, clothing and motor vehicle parts fell the most and with the need to spend money on holiday purchases, consumers also ate out less. The retail sales report was the last opportunity for some optimism in the dollar. We expect the Federal Reserve to react to the weak consumer spending report by adopting a tinge of dovishness in their monetary policy statement on January 28th. Meanwhile jobless claims and import prices also failed to help the dollar. Claims rose from 433k to 444k while import prices remained unchanged. Traders should not be encouraged by the drop in continuing claims from 4.807 million to 4.596 million because it reflects the expiration of unemployment benefits. Overall, the weak economic reports should push the dollar lower going into the FOMC meeting later this month.   

Friday Data Preview

If price pressures were really to blame for the decline in sales, then we should see a drop in Friday’s consumer price report.  Although gas prices increased significantly in January, the prices at the pump actually decreased in the month of December. Aside from CPI, the Empire State manufacturing survey, industrial production and the University of Michigan Consumer spending report is due for release tomorrow.  The rise in the IBD Consumer Confidence index report suggests that confidence may have improved in January.  

EUR/USD: TRICHET RELUCTANT TO RAISE RATES

With a monetary policy announcement from the European Central Bank and the U.S. retail sales report due for release, one would expect more significant volatility in the EUR/USD.  However the intraday price range of the currency pair was only slightly larger than 100 pips as cautious comments from ECB President Trichet offset weaker U.S. economic data.  Given uneven growth and low inflation, Trichet indicated that the current level of interest rates is still "appropriate." However what worried euro bulls was his comment that during the recovery, quarterly GDP will be up and down.  As a result, the central bank will remain "very alert, very prudent" on the economic outlook. The euro has struggled to rally after the ECB announcement because these are not the words of a hawkish central banker.  Nonetheless, given the recent trend of U.S. data compared to European data, the ECB still looks more likely to raise interest rates before the Fed.  Eurozone industrial production jumped 1 percent in November, reflecting stronger activity in the manufacturing sector.  Inflationary pressures are also picking up in the region with German consumer prices revised higher in the month of December.  As for Greece, Trichet said they cannot expect to receive any special treatment despite their desperate financial straits and it is absurd to assume that deficit worries will prompt Greece to exit the European Monetary Union. The Greek Prime Minister vowed to cut their spending and raise revenue by EU10 billion over the next 3 years. Eurozone CPI and trade balance figures are due for release tomorrow.  We expect Trichet's comments to only have a temporary drag on the EUR/USD as the greater concerns lie with the U.S.  Meanwhile Swiss producer prices are due for release tomorrow.  Since hitting a low of 1.4724 earlier this week, EUR/CHF has recovered but the gains appear to be fleeting.  Given the rise in energy prices and the prior weakness in the Franc, PPI is expected to rise.  

GBP/USD: EXTENDS GAINS AGAINST EURO

The British pound ended the NY trading session virtually unchanged against the greenback but stronger against the euro.  In fact, EUR/GBP has fallen for the third consecutive trading in the face of little U.K. economic data.  This is a quiet week for the pound but that will change next week when the U.K. economic calendar heats up.  EUR/GBP traded heavy throughout the European trading session despite stronger than expected Eurozone economic data.  However losses in the currency pair may be limited to the 0.8845 level as this represents a key support level that stems out of prior lows and the 200-day SMA.  The outlook for the U.K. and Eurozone economy has not changed enough to warrant a break of this price level because the Bank of England is still expected to lag the European Central Bank in tightening monetary policy.  The outlook for the U.K. economy is also unclear.  Both the Eurozone and the U.K. are at risk of a fiscal crisis, but the British government has already announced a VAT tax increase and taxes on bonuses, which could crimp consumer spending in the early part of the year.   Meanwhile the GBP/USD is hovering right below an important resistance level.  If the currency pair can break above 1.64, there is scope for a much stronger move up towards 1.68 but that move will most likely be driven entirely by USD weakness and not GBP strength.  

AUD/USD: RALLIES ON STRONG LABOR MARKET NUMBERS

The Australian, New Zealand and Canadian dollars gained strength against the greenback on the heels of stronger domestic data, weaker U.S. data and mixed commodity prices. Australia was the only country that released economic data last night but that was enough to lift all of the comm dollars.  For the fourth month in a row, Australia reported solid job growth.  More than 35k people found new jobs in December, blowing away the market's 10k expectations.  As a result, the unemployment rate fell to 5.5 percent, the lowest level since April.  Although the bulk of job growth was concentrated in part time hiring, there is no question that the economy is humming along and the unemployment rate has peaked.  According to Deputy Prime Minister Julia Gillard, "Today's figures provide further evidence of how Australia has outperformed virtually every other advanced economy during the global recession." The latest employment numbers support another rate hike by the RBA in February.  Meanwhile New Zealand credit card spending rose 0.7 percent, the same pace as the previous month.  Canadian motor vehicles sales is the only economic report expected from the 3 commodity producing countries over the next 24 hours.  

USD/JPY: TRAILING US YIELDS

As the currency pair that tends to react most logically to U.S. economic reports, USD/JPY has tanked following the weaker than expected U.S. retail sales report.  The performance of the Japanese Yen on the other hand has been mixed with the Asian currency rising against the euro, British pound, U.S. and New Zealand dollars but falling against the Australian and Canadian dollars. Over the past few weeks, USD/JPY has tracked U.S. yields closely and this trend continues to dominate trading in the pair.  Last night's Japanese economic reports were mixed with machine orders falling in the month of November but machine tool orders surging in December.  The Corporate goods price index, which is an inflationary measure increased modestly, which suggests that even though price pressures are increasing, they remain modest.  There are no additional reports from Japan due for release this week.  

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play tomorrow. Euro-zone’s Consumer Price Index and trade balance will be released at 10:00GMT or 5:00AM EST. The United States will release its consumer price inflation figures at 13:30GMT or 8:30AM EST followed by the Empire State and University of Michigan Consumer sentiment survey at 15:00 GMT or 10:00 AM EST. EUR/USD has entered the Bollinger band buy zone earlier this week. However, the pair will have to face several impending levels of resistance before the rally goes any further. The first level to watch is 1.4569, which is the 38.2% retracement from the December 3rd high to the December 22nd low. However, if 1.4569 does not hold an even stronger level is ahead where the 50% retracement and 100-day moving average converge at 1.4675. Support should be found at the 20-day moving average which lies at about 1.4400.

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Comments (4)

Doobp

January 15, 2010 at 12:20 AM ET

After the news releases and fundamental outlooks, I thought that Eur may rise. But Eur Sellers are rising. Anyone think that Eur will break the 1.44 handle?

schultzz.at

January 15, 2010 at 03:36 AM ET

Considering the 35K EuroFx short position of Chicago futures traders and the Fed rate hike fantasy fading away, I was also prepared for a more pronounced Euro rally towards the mid 1.46s.
The 'earnings optimism' should also support the Euro as far as it is viewed as a 'risk asset'.

Without any news and the Dow still trading at 10,700, the EUR/USD nevertheless dropped 80 pips in Far East and 50 pips in early European trading. I am currently favoring the scenario of a break of the 1.44 with support below 1.40. However, I do not expect a sustained break of the 1.44 for today. The German trade numbers for Nov were quite strong and therefore the EA16 trade balance should not disappoint.

Next week, I think, the only major EA16 news release will be 'Industrial New Orders' on Friday. The U.S. has a holiday on Monday and the calender is very light. So supply and demand should dominate EUR/USD trading.

By the way, Greece's 10yr bonds are currently yielding 6.13%. Does anyone feel a desire to buy?
Tom Schultz.

alexjbrandt

January 15, 2010 at 04:02 AM ET

lol. I'm feeling that the 6.13% comes with a higher risk of default then other countries :P

but with that said, here is some interesting numbers about US debt:(not sure how accurate it is)

http://www.usdebtclock.org/

alexjbrandt

January 15, 2010 at 03:08 AM ET

hmm, well not sure what is driving the dollar up. Certainly can't be fundamentals. Kind of was hoping the weak retail sales report and increase in jobless claims would have the opposite effect we're seeing. The AUD/USD has broken its 4 hr trend support line :(

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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.