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Will Retail Sales Overshadow Stimulus Package?

Last updated 2/11/2009 4:43 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• US DOLLAR: WILL RETAIL SALES OVERSHADOW STIMULUS PACKAGE?
• GBP/USD: COLLAPSES ON PROSPECT OF QUANTITIATIVE EASING
• EUR/USD: RATE CUT TALK CONTINUES TO DRIVE EURO LOWER
• USD/CAD: CANADA REPORTS FIRST TRADE DEFICIT SINCE 1976
• AUD/USD: EMPLOYMENT NUMBERS DUE FOR RELEASE
• NZD/USD: GOLD PRICES AT $939.22
• USD/JPY: SAFE HAVEN STATUS AT RISK?

EXPECTATIONS FOR UPCOMING FED MEETINGS

US DOLLAR: WILL RETAIL SALES OVERSHADOW STIMULUS PACKAGE?

After selling off aggressively on Wednesday, currencies and equities have staged an unconvincing relief rally.  Weakness was the theme for most of the day until the news broke that the House and Senate reached a deal on the economic stimulus bill.  This week, politics is impacting the currency market far more than economics, but that could change with tomorrow’s retail sales report. If the contraction in consumer spending is deeper than the market’s 0.7 percent forecast, we could see risk aversion resume, driving the US dollar higher.  Jobless claims are also due for release and they are expected to top 600k for the second week in a row.  

Politics vs. Economics

The market was disappointed by Tim Geithner’s Financial Stability plan and the House / Senate will have to face the same test with the Economic Stimulus bill.  The cost of the stimulus package has been trimmed down to $789 billion, which may be a relief for taxpayers.  The House is expected to vote on the bill tomorrow followed by a Senate vote on Friday.  The goal is to have the bill on Obama’s desk by the weekend and signed sometime next week.  Any delays could resurrect risk aversion.  Since nothing definitive is expected until Friday afternoon, currencies and equities may have a tough time holding onto their gains.  Economics could return to the forefront as the market shifts its focus to the January retail sales report.  

Next to the non-farm payrolls report and the Federal Reserve’s interest rate decision, retail sales is one of the most market moving indicators for the US dollar.  In December, retail sales fell 2.7 percent, the largest decline on record.  Economists are forecasting a much smaller decline for the month of January, but massive job losses could have crimped consumer spending.  With holiday shopping out of the way, Americans should have been more frugal.  However the reason why economists are optimistic is because the International Council of Shopping Centers reported that retail sales in January fell less than the previous month.  Also, retailers have resorted to deep discounting to drive sales. The odds are still skewed towards weaker numbers and should consumer spending fall more than 1 percent, we could see liquidation out of higher yielding currencies and back into US dollars.  It is important to remember that the dollar is trading on relative performance and not US fundamentals.  If the US economy does not recover, it will be difficult for other countries to do so as well.

Protectionism Could Close Trade Gaps

In the month of December, the US trade deficit shrank from -$41.6B to -$39.9B.  In any other economic environment, this would be a positive for the US economy, but a shrinking deficit now represents more weakness than strength. The narrower trade deficit in the US was not much of a surprise since demand is declining globally, driving imports and exports lower.  The deficit should continue to narrow over the next few months and may even turn into a surplus if Washington is successful at promoting, "Buy American."  Recessions always fuel protectionist mentalities to the sharp criticism from nations abroad, and protectionism is how the US is leaning.  

GBP/USD: COLLAPSES ON PROSPECT OF QUANTITIATIVE EASING

The British pound extended its losses as Bank of England Governor King suggested that their next option will be Quantitative Easing.  According to King, with the country in a “deep recession” and the central bank mandated to keep inflation near 2 percent, further easing will be needed.  Having reduced their growth and inflation forecasts, the central bank now expects annualized GDP growth to fall 4 percent in the first quarter and for inflation to slow to 0.5 percent by the end of the year.  Since 2 percent is their inflation target, in order to engineer an increase in price pressures, the BoE will have to cut interest rates further and resort to quantitative easing.  At this point, there is very strong chance that UK interest rates could hit US levels.  The central bank is expected to make Quantitative Easing official at their next meeting, which means that they will be increasing money supply through asset purchases.  Meanwhile, despite the BoE’s dismal outlook on the economy, there were some silver linings in the employment numbers.  Even though the unemployment rate hit a 10 year high, the number of people claiming unemployment benefits in January was less than the previous month while average hourly earnings held steady.  Looking ahead, the prospect of further rate cuts could weigh on the British pound.

EUR/USD: RATE CUT TALK CONTINUES TO DRIVE EURO LOWER

As we get closer to the European Central Bank’s monetary policy decision on March 5th, we have seen ECB officials grow more dovish.  Yesterday, ECB member Weber warned that the central bank should not avoid lowering interest rates aggressively because all signs point to further weakness in the Eurozone economy.  This afternoon, ECB member Stark agreed that there is definitely room to cut interest rates.  ECB President Trichet previously confirmed that the market’s bet on a 50bp rate cut next month is probably right and recent comments from ECB officials confirm that interest rates will fall to at least 1.50 percent.  The prospect of more rate cuts is weighing on the Euro because traders are looking beyond March and are starting to think about whether Eurozone rates could hit 1 percent.  Like Germany, the current deficit in France narrowed significantly in the month of December on weakening global demand. Euro traders should not expect any support from the Eurozone industrial production numbers due for release tomorrow.  French and German industrial production fell significantly in December, signaling a sharp decline for the region as a whole.  In November, Eurozone industrial production dropped by 1.6 percent, which at that time was the largest decline in 18 years.  According to our Intraday Technical Analyst FX360 Technical Analyst Staff, the EUR/USD may not see support until 1.2785.

USD/CAD: CANADA REPORTS FIRST TRADE DEFICIT SINCE 1976

The rally in equities drove the Canadian, Australian and New Zealand dollars higher despite weaker economic data.  For the first time since 1976, Canada reported a trade deficit of -0.5B (see chart).  Unsurprisingly, the slowdown in the US and the decline in oil prices have pushed exports down 9.7 percent.  Imports also declined for the second consecutive month and given the deteriorating labor market, consumer spending will probably contract even further.  Consumer confidence in Australia also plummeted which suggests that job losses may have mounted in the month of January.  Australian employment numbers are due for release this evening and even though improvements have been seen in the employment component of service and manufacturing sector PMI, hefty job losses are still expected.  

USD/JPY: SAFE HAVEN STATUS AT RISK?

Despite another day of disappointment in the realm of global economic affairs, the yen has held its ground against the dollar, limiting the damage from its two day assault against the currency. Most other currency pairs are experiencing a muted yen bias that is expressing the transfer from fear into uncertainty. Japan will receive an indication of price pressures in tonight’s Corporate Goods Price Index, expected to show a slight improvement to -0.6%. However, arguably the most important release of the month will be next week’s GDP report. The reason that we are mentioning this so early is that current expectations are predicting a tremendous 11.0% deficit in growth over the last year. Such a drastic release may be enough for traders to realize that Japanese fundamentals do not warrant the continuous appreciation of the yen. If this is the case the report might even be beneficial to the economy by relieving the currency strains on the weakened Japanese exporters.

AUD/USD: Currency in Play for Next 24 Hours

AUD/USD will be the currency pair in play for the next 24 hours. The Australians are expected to report their Employment Change and Unemployment rate at 7:30 pm ET or 00:30GMT. Additionally, Consumer Inflation Expectations will be reported at 7:00 pm ET or 00:00 GMT.

AUD/USD is currently within the Bollinger Band range bound trading zone. After yesterday’s strong move, it have managed to stay unchanged on an otherwise volatile trading day. For technical levels, we are using the Fibonacci retracements of the late-October low to January high. This particular retracement has been very significant in coinciding with several major turning points. Support for further downward pressure currently stands at 0.6488 or the 61.8% retracement. Price action has failed to break this level for two consecutive days. If it breaks, 0.6276 or the 78.6% retracement is next at a major low. Limits to upside pressure stand at 0.6785 or the 38.2% retracement; also equivalent with the previous high. The reports tomorrow will present a revealing look at the Australian economy and therefore present the potential for the testing of these important levels.

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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.