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Return of the US Consumer

Last updated 10/15/2012 2:42 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Return of the US Consumer

For the past couple months, investors have been busy trying to determine what the potential and then real effects of additional Quantitative Easing by the Federal Reserve would have on the global economy let alone the US economy. Meanwhile, the very economy the Fed was attempting to bolster has been on a bit of a hot streak as consumers are getting jobs, making purchases, and brimming with confidence both before and after the implementation of QE3.

Today’s good news came by way of US Retail Sales which printed at a 1.1% increase beating estimates of 0.8%, while the previous month’s figure was revised upward to 1.2% from 0.9%. The back to back better than 1% gains last occurred three years ago. Combined with unemployment below 8% and every conceivable consumer confidence report showing consumers more confident than they have been since before the Great Recession; declarations that things may be taking a turn for the better are warranted. 

There may be no happier person to see this positive development than Fed Chairman Ben Bernanke who has been trying to explain why QE3 was necessary since its announcement last month. Previous QE programs were brought about due to quickly declining economic readings and fear of another Lehman-like event taking place. In other words, they were brought online to try to turn around a declining economy, and they had predictably mixed results.

This time around, the market wasn’t heading in to a tailspin; it was just growing at a frustratingly slow pace, but growing nonetheless. So instead of having to stop the decline and try to turn the economy around Bernanke was able to add on to an already growing market. The results so far have been nothing but positive, but only time will tell if it continues.

Which leads us in to how the market is reacting to news events like today’s US Retail Sales. The overwhelmingly positive data would typically create a risk positive move that would support not only equities, but commodities and risk currencies.

However, immediately after today’s event, the EUR, AUD, NZD, GBP, and CAD all lost value against the USD as if the data was so dismal that the market decided it was risk off. The confusing price action could partly be attributed to news of Greece running in to some more fiscal issues , but the market was moving sideways to down before the Greek news hit the wires.

Perhaps a shift in the normal way of thinking about risk is in the works, in that good US data actually means that the USD will gain value against traditionally risky currencies. Traders may be trying to determine if or when QE3 will be ended by the Fed now, and every good report increases the chances of Bernanke and the chairs pulling their stimulus.

Only time will tell, but assessing the reaction of the market based on fundamental events may need to be temporarily adapted to a new view of market price action. Tomorrow’s Consumer Price Index release in the US may be one of those reports that lets us verify it even further.

Looking Forward

Tonight’s most important release will be that of the Reserve Bank of Australia’s meeting minutes from their meeting two weeks ago. At that meeting the RBA cut Australia’s interest rate 25 basis points down to 3.25% and signaled that future cuts could be coming by saying, “Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago.”

Therefore, the meeting minutes are expected to be very dovish and could weigh on the AUD in both the short and long term. If there is any clear indication from the minutes that the rate could be cut further, a run toward parity could be coming over the next couple weeks. If they are not as dovish as expected, the short covering could be fierce as investors look to buy the AUD in spades.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner).

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.