Slow Rise for Dollar Despite Strong Retail Sales
Daily FX Market Roundup July 16, 2020
Welcome to the summer doldrums. A long list of economic reports were released in the last 24 hours but a busy economic calendar failed to translate into big moves for currencies. USD/JPY traded in a narrow 20 pip range before and after US retail sales while EUR/USD meandered within a 50 pip range before and after ECB. It wasn’t until after the London close did we see some upside momentum in the greenback.
What’s interesting is that at the onset, the greenback was unable to rally despite stronger retail sales. Consumer spending rose 7.5% in June, against a 5% forecast. Demand was also strong excluding autos and gas while May data was revised higher. Overall the retail sales report was better than expected and should have driven the greenback sharply higher. However, investors who sold dollars and drove stocks lower were quick to point out that manufacturing activity slowed in July and jobless claims rose more than expected. Eventually the greenback gained control but pockets of weakness in the US economy raised concerns about what’s to come as US states roll back reopening measures. With coronavirus cases growing in the US and states losing rather gaining control of local outbreaks, the only hope lies in a vaccine. Unfortunately there was some bad news on that front with Moderna reporting adverse reactions in roughly 50% of their test candidates and King’s College reporting that antibodies of recovered patients declined significantly within months of infection.
Euro stayed above 1.15 after the European Central Bank’s monetary policy announcement but broke once London markets closed. The ECB left interest rates unchanged, a decision that was wildly anticipated. President Lagarde’s tone was subdued, but investors did not seem to care. She said there’s a significant increase in slack, the outlook remains highly uncertain, the recovery is uneven and as a result, the central bank stands ready to adjust all instruments as needed. On the bright side, the latest data shows the euro area in a good place and activity should rebound in Q3. Lagarde’s comments did not help or hurt the euro but at the end of the day, every major central bank is in wait and see mode. Recoveries are easily threatened by a spike in cases at home and abroad so accommodative policies need to remain in place with no rate hikes on the radar. Sterling also fell despite better labor market numbers. Jobless claims declined in June and the unemployment rate improved.
The worst performing currencies were the Australian and New Zealand dollars which led the slide followed by the Canadian dollar. Although job growth in Australia was 2 times greater than expected, all of the jobs were part time and not full time. The unemployment rate also ticked up to 7.4% from 7.1% while consumer inflation expectations dropped slightly. In China, growth exceeded expectations in the second quarter but retail sales fell for the fourth month in a row instead of turning positive like economists anticipated. This deterioration overshadowed the improvement in growth and drove the commodity currencies lower. New Zealand’s manufacturing PMI report is scheduled for release this evening – the country’s successful reopening should lead to stronger manufacturing activity but with risk appetite driving NZD flows, the positive impact may be limited.