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USD: Will Retail Sales Trigger Any Fireworks?

Last updated 10/13/2011 5:00 PM ET (GMT -5) 2 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: WILL RETAIL SALES TRIGGER ANY FIREWORKS?
• EUR: EFSF EXPANSION APPROVED, BUT TROUBLES CONTINUE
• GBP: TRADE DEFICIT NARROWS
• CAD: TRADE DEFICIT WIDENS MARGINALLY
• AUD: STRONG EMPLOYMENT NUMBERS
• NZD: BUSINESS ACTIVITY SLOWS
• JPY: BOJ COULD CONSIDER MORE STIMULUS

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: WILL RETAIL SALES TRIGGER ANY FIREWORKS?

The reason why investors have taken their eye off the U.S. dollar and why the dollar’s value has been frozen against the Japanese Yen for the past 2 months is because there have been very few surprises in the U.S. economy that can be game changers for the Federal Reserve.  Today’s trade balance and jobless claims reports were perfect examples as both reports showed very little improvement or deterioration in the economy. However tomorrow’s retail sales report is one of the few pieces of economic data that could cause the central bank to alter its strategy for monetary policy.  In particular, if consumer spending rises strongly in the month of September, it would imply that the rebound in non-farm payrolls is translating into greater demand which would be the best case scenario for the U.S. government and the U.S. dollar. In fact, if retail sales rises more than 0.5 percent, we could see USD/JPY reverse today’s slide and make a run back to its one month high. There is reason to believe that retail sales recovered last month. According to the International Council of Shopping Centers, a strong back to school season helped boost the results for chains such as Macy’s Target and Kohl’s. The ICSC reported a 5.5 percent rise in chain store sales and a nice 10.4 percent rise in luxury sales. The Johnson Redbook survey also found demand increasing last month although not as strongly as the ICSC report. Although we expect the dollar to benefit from a healthy retail sales number, the impact that it will have on the greenback and risk appetite in general will be limited unless sales overshoot estimates significantly. Anything short of a 1 percent rise will keep the Fed on the fence about implementing QE3 in November. If retail sales fall short of expectations, it could trigger a fresh wave of risk aversion but once again, unless retail sales are abysmally weak, the downside will probably be limited as well. In other words, we do not expect Friday’s retail sales report to set off any fireworks in the market.

The reason is because small improvements in U.S. data do not go very far in helping the Federal Reserve clarify its outlook for the U.S. economy.  In the month of August, the trade deficit narrowed to -$45.608B from -$45.625B. If you drop the last 2 digits and round the numbers, trade activity was virtually unchanged. There was a barely noticeable drop in both imports and exports. The same can be seen in weekly jobless claims, which fell from 405k to 404k. The U.S. economy is chugging along at an exceedingly slow pace with barely any improvements and this is problematic for the Federal Reserve because it doesn't alleviate any of the pressures to increase stimulus. We learned from yesterday's FOMC minutes that the central bank is willing and ready to take additional steps to support the U.S. economy, if the outlook worsens. Thankfully it has not and that is why the latest economic reports are not particularly damaging to the dollar because it keeps investors guessing about whether the Fed will resort to QE3. The jobless claims report provides very little insight into the health of the labor market other than showing that conditions haven't deteriorated. Continuing claims eased to 3.670M from 3.725M while the four week moving average of jobless claims fell to 408k from 415k.

EUR: EFSF EXPANSION APPROVED, BUT TROUBLES CONTINUE

After selling off throughout the European trading session, the euro slowly climbed higher in North American hours to end the day unchanged against the greenback. The recovery in the EUR/USD is impressive and mirrors the intraday reversal seen in equities. The currency pair benefitted from Slovakia’s approval of the expansion to the European Financial Stability Facility putting the EUR 440 billion EFSF in full go mode.  Three months after the initial decision was announced, Europe will finally be able to intervene in the debt markets and to refinance the capitalization of financial institutions through loans to governments if needed. Although the final approval of the EFSF expansion is positive for the euro, investors have moved on because even with a war chest of EUR 440 billion, the Eurozone will not be able to handle a Spanish or Italian default. Economists and investors are now calling for a EUR 3.5 trillion bailout fund. If it took 3 months to approve a EUR440 billion expansion, imagine the time that it would take to approve a new bailout program four times that size. The recent rally in the euro reflects optimism but we continue to believe that rose is the wrong colored glasses to have on. According to the European Central Bank’s monthly report, the banking sector is expected to suffer greatly from any haircuts forced on investors and unfortunately this appears unavoidable as the market believes that Greek bond holders could be forced to take a haircut closer to 50 percent.  There were no major Eurozone economic reports released this morning but ECB member Draghi expressed opposition to greater ECB involvement in any sovereign bailout. As the incoming President of the Central Bank, these comments suggest that he may remain faithful to Trichet’s views when he takes office. Eurozone consumer prices are scheduled for release tomorrow along with the trade balance report. Stronger numbers are expected all around which could lend further support to the euro. Meanwhile the Swiss Franc declined against the euro and U.S. dollar on the heels of lower inflationary pressures. Producer prices fell for the fifth consecutive month and even though the monthly decline was only 0.1 percent, on an annualized basis, PPI dropped to its lowest level since December 2009.

GBP: TRADE DEFICIT NARROWS

The British pound strengthened against the euro but weakened versus the U.S. dollar. Investors shunned risk trades as world’s developed economies struggled to gain momentum. The U.K. trade balance deficit narrowed in August printing at -7.8B versus -8.2B in July which is encouraging for the pound but export demand could remain depressed in the months coming with the Eurozone economies potentially weakening. Meanwhile, the Centre for Policy Studies (CPS), a U.K. think tank, sounded a warning to Chancellor of the Exchequer George Osborne about the faltering economy. According to a statement, CPS believed that the country’s current low growth rate are threatening the government’s efforts to eliminate the structural deficit by 2015 with its program of 111 billion pound in spending cuts and tax increases. The think tank called on the government to cut taxes on corporations to stimulate the economy. Moreover, some critics of Prime Minister David Cameron’s government are raising concerns that government’s austerity measures could tip the economy back into recession or lead to a downgrade by rating agencies. The stagnant economy also caused headaches among the central bankers as the Bank of England expanded its asset-purchasing facility by 75 billion pounds last week. The central bank noted “severe strains” in bank funding markets and Governor Mervyn King said the move was a response to what may be the worst financial crisis ever. In supporting the doves, BoE Deputy Governor Charles Bean joined the ranks of Adam Posen and Martin Weale. Bean indicated the possibility to boost easing efforts in an interview: “If we need to undertake further purchases then we will do so.” Nonetheless, while monetary policy could provide boost to the economy, the stringent fiscal budget could undermine recovery. Therefore, the opposition Labour Party called on Mr. Cameron’s government to allocate emergency funding to invest in job creation and slow the pace of deficit reduction. After the number of unemployed reaching the highest in 17 years, the U.K. economy could definitely use some help not only from monetary stimulus but also fiscal stimulus. Looking ahead, there are no economic reports from the U.K. tomorrow.

CAD: TRADE DEFICIT WIDENS MARGINALLY

The Australian and New Zealand dollars extended their gains against the greenback but the Canadian dollar failed to participate in rally despite better trade numbers. Canada’s trade deficit widened to -0.62B in August from -0.54B but the upward revision to the prior month's numbers and the better than expected read protected the Canadian dollar from further losses. Unlike the U.S., Canada enjoyed an increase in both exports and imports but the deficit widened because import demand outpaced exports. Considering that demand increased in nearly all of sectors tracked, we can interpret the trade report as a positive development for the Canadian economy. What was most impressive was the fact that despite the sharp decline in oil prices in August, demand for other products boosted overall exports and imports. The Australian dollar on the other hand was boosted by better employment figures. According to our colleague Boris Schlossberg, “this was the best job reading in four months, suggesting that the economy Down Under remains robust despite concerns over a contraction in global growth. Nevertheless, as many analysts have pointed out, the pace     of job growth in Australia has slowed markedly this year with the economy only generating 40K new jobs year to date versus 281K new jobs in 2010. Still today’s news should remove any expectations of  an RBA rate cut before the end of this year as the central bank will likely remain in a neutral mode as it continue to monitor global demand.” The New Zealand dollar on the other hand rode on the coattails of the Aussie, shrugging off declines in business activity and food prices.

JPY: BOJ COULD CONSIDER MORE STIMULUS

The Japanese yen gained grounds against all of the major currencies today. As investors remain wary of uncertainties in the market, risk aversion helped to drive the yen higher. The Tertiary Industry index declined for the second month in August printing at -0.2 percent due in large part to weaker activity in the retail and financial sectors. In addition, the appreciation of the yen continues to pose downside risk to economic recovery in Japan. The latest minutes from Bank of Japan’s meeting in September also cautioned the hindering effects of a strong yen. Many members raised as medium- to long-term risk factors that "the recent appreciation of the yen would not only exert downward pressure on exports and corporate profits, but should this trend take hold, it could also accelerate Japanese firms' shift of production sites to overseas, leading to the hollowing out of industries," the minutes said. Furthermore, some members saw increasing possibility for additional quantitative easing as European sovereign debt crisis and the slowdown in the U.S. crippled growth in the global economy. Since the BoJ expanded its asset-buying program in August, the world’s economy had hit more stumbling blocks and the market had gotten extremely volatile. With Japan’s deflated prices, the central bank has more leeway to increase its balance sheet. Thus, the Japanese yen could remain vulnerable ahead of BoJ’s meeting in October. Looking forward, without any significant economic data from Japan, the price action of the Yen will continue to hinge on risk appetite.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be our currency pair in play for the next 24 hours. From EZ, we expect the release of CPI data at 5:00 AM ET/ 9:00 GMT. From the U.S., we expect retail sales at 8:30 AM ET/ 12:30 GMT, followed by U of Michigan Consumer Confidence index at 9:55 AM ET/ 13:55 GMT and Business Inventories at 10:00 AM ET/ 14:00 GMT.

Despite its recent rally, EUR/USD has fallen back into range-trading zone, which we determined using the Bollinger Bands. The nearby support is at 1.3569, the 23.6% Fibonacci level and the low of Oct.10 ^th . We drew our Fibonacci retracements from the swing high in May to the 9-month low in October. Further down, the lower first std. dev. Bollinger Band could provide support at 1.3379. On the upside, the first level of resistance is at the 38.2% Fib level and yesterday’s high – 1.3831. If broken, the 50% Fib level and 200-day SMA could further contain the pair’s rally at 1.4042.

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Comments (2)

Darkdoji

October 14, 2011 at 07:07 AM ET

Yes you are correct to say flat reports will not cause much volatility and therefore limited price action is likely in response but you are wrong to think that there will be no fireworks as a result. Whichever way, flat or pointed data, there will be fireworks - at least for the Euro and associated pairs. The reason is that Euro bulls are poised to go up strong despite the odds and they are looking for a trigger - anything. So by my reading its got to be 1.3936 or nothing (its the last tradeday and we got hit weekly resistance (less likely support) today) however - it is a two sided market and should more money wish to trade down then there will be a hell of a scramble to get out of the way - meaning an equally massive selloff. But the way I read it the bulls are so poised that regardless of data interpretation they are headed up and could even move ahead of data release (though that is unlikely now given no triggers to this point). Also note the limited reaction to negatives (Spain downgrade). Anyway lets see how it plays - I am waiting for an opportunity to enter up more than enter a trade in a reaction lower - but thats the market and we got to wait for a decision don't we?

Darkdoji

October 14, 2011 at 07:22 AM ET

By the way I am interpreting from updated price positioning data - just to acknowledge a quality of the piece to which I reacted below.

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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.