Dollar: Retail Sales Pave Way for More Optimism from Fed

Last updated 3/12/2010 8:53 AM ET (GMT -5) 9 Comments

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Kathy Lien

Director of Currency Research, GFT

Stronger U.S. retail sales numbers helped to drive the dollar higher against all of the major currencies. As usual, we expect the dollar to sustain its gains against the Japanese Yen but the dollar's strength against higher yielding currencies should be limited once U.S. equity markets open as a recovery in risk appetite encourages flows out of the dollar and into the euro, British pound and Aussie.  

According to the retail sales figures, even the blizzards in the Northeast could not keep U.S. consumers out of the stores.  Economists were looking for spending to fall by 0.2 percent due to weak weather and a falloff in demand for autos, but strong spending at retailers, bars and restaurants more than made up for the difference. It is a very healthy trend to see Americans eating out more and upgrading their electronics, particularly since the labor market has improved because it means that this recovery in demand should be sustainable.  

Excluding the lack of demand for autos, retail sales rose 0.8 percent, far much stronger than the market's 0.1 percent forecast.  The pickup in consumption was not a huge surprise following strong reports from individual retailers, the International Council of Shopping Centers and the Redbook survey.  Sales of electronics and appliances rose 3.7 percent, the largest rise in a year while sales at restaurants and bars rose 0.9 percent, the most since April 2008.  

Comments (9)

MoneyManager

March 12, 2010 at 09:38 AM ET

This Fed statement worries me a bit. I think a lot of "extended period" disappearing is getting baked into the USD/JPY price, and I'm not sure the wording is going to disappear *this* time, so there may be disappointment. And of course the BoJ is certainly capable of being less convincing than the GoJ would like them to be next week. All told, it could be a midweek letdown, I fear. Love to get your take on it.

schultzz.at

March 12, 2010 at 12:39 PM ET

After a very strong 4th quarter consumer spending seems to lose momentum (January sales were revised down to +0.1% from +0.5%). First quarter growth could still be robust if business investment and trade pick up the baton.
Nevertheless, equity valuations are way too high compared to bonds. I am short CAD and crude oil futures.
Tom Schultz.

MoneyManager

March 14, 2010 at 06:55 AM ET

Hey? You think US bonds have upside? Oh, they will have their moments, just like a bomb-diffuser has his. But eventually ... BANG!!!

schultzz.at

March 15, 2010 at 02:17 AM ET

Specs are short 10yr note and 30yr bond futures big time. They are 'rewarded' with massive rollover losses if they want to hang on.
Economic reports do give little evidence for a strong recovery. The unemployment rate U6 (counting marginally attached and those working part time, but would prefer a full time job) was at 16.8% in February up from 16.5% in January.
Capacity utilization is at 72.6%, this is only slightly above the previous historic low of 70.9% in December 1982. Housing markets are barely recovering despite massive government intervention.

At the same time, the effective Fed funds rate and 3-month dollar market rates are slowly crawling higher. This makes me believe that the yield curve is beyond its steepest point.
My preferred scenario for fixed income contains higher yields at the short end while longer maturities remain firmly anchored at current levels.
Tom Schultz.

MoneyManager

March 15, 2010 at 04:15 AM ET

schultzz.at: I think I have mentioned this before, somewhere, but it bears mentioning again. Just because the market thinks it's going to happen, does NOT mean it's not going to happen.

Let me elaborate a bit. Sentiment indicators, such as open positions, etc., are mostly reliable *ONLY* when they reach historical extremes. They need to be in the ozone layer. Quite frankly, the market usually does indeed know what it is doing. You can't just bet against size; you also have to know -- for sure -- what that size represents.

For starters, you'd have to tell me exactly WHO these specs are. If they are institutional, my bet is with them. Capice? (Don't imagine for a hot minute that institutions don't take speculative positions -- they do every day.)

Morgan Stanley, for one, thinks March NFP (due in two short weeks) will be +300,000. Yeah. PLUS 300,000! Chew on that number a bit and see what you think it might do to US bonds ... if it is only HALF that amount. Would you want to be long US bonds if the NFP number was + 110,000? Me, either.

schultzz.at

March 15, 2010 at 07:07 AM ET

Predicting the NFP numbers is a futile task. Hiring for the census will most likely be responsible for 100K+ prints in the coming months, but these are temporary jobs.
Anyway, 2 weeks is a long time. As we speak I am positioning for a sell-off in commodities, stocks and risk FX.
Tom Schultz.

MoneyManager

March 15, 2010 at 07:22 AM ET

I don't know about futile, and of course there will be census hires. Everyone should position him or herself the way they feel is advantageous. The big question in my mind is whether the correlation between risk avoidance and weaker USD/JPY will continue. I'm not so sure it will. The prospect of higher US rates will tend toward risk avoidance. It will also tend toward a stronger dollar, particularly vis a vis the yen.

kingnai

March 12, 2010 at 01:05 PM ET

what are your thoughts on GBP/USD ?

FXDragon

March 15, 2010 at 02:49 AM ET

Ok. Heres how its gonna go down. Im gonna say buying stocks and usdjpy and risk fx. Then theyre gonna go down.
Said.

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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.