Retail Sales Could Set the Tone for US Dollar

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Don’t look now but the US economy is improving better than most forecasters have predicted. Last month’s unemployment data with its upward revisions in job growth and a lowering of the unemployment rate was only the most recent major data point to suggest that US growth is likely to accelerate into the year end. Last weeks improved jobless claims numbers along with a sharp rise in University of Michigan consumer sentiment reading were all part of recent trend of upside economic surprises.

While the most recent labor data statistics have come under scrutiny due to the usual election year politics, the broader underlying trends confirm the case for upward revisions. Two surveys in particular – the Citibank surprise index and the Bloomberg Economic surprise index- show that US economy is performing better than anticipated even as the threat of the fiscal cliff looms on the horizon.

Yet the better than anticipated economic results have not translated into any discernable uptake in USDJPY which has been mired in the 78.00-79.00 region for all of last week. Part of the problem has been the decline in US 10 year rates which have decline to 1.65% from 1.75% since the start of the month as fixed income investors refuse to believe the growth story.

That’s why today’s US Retail sales number could prove pivotal to setting near term investment expectations. The market anticipates a reading of 0.6% versus 0.8% the month prior which would suggest that growth remains positive but hardly robust. Yet if the data surprises to the upside confirming the recent burst in consumer sentiment, it could reset market perceptions about US performance into the year end.

For now USDJPY remains stuck in a low volatility range as traders await greater clarity on economic front. However, if the week starts of with a positive surprise in US retail sales it could trigger a more constructive environment for the greenback with 79.00 level a key barrier for USDJPY. If that figure is broken, the pair may finally mount a rally towards 80.00.

Boris Schlossberg
Managing Director

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