USD: Retail Sales is Last Piece of Data that Could Sway the Fed

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Daily FX Market Roundup 09-12-13

USD – Retail Sales is Last Piece of Data that Could Sway the Fed
EUR – ECB Draghi Expresses Continued Skepticism of Recovery
GBP Holds Onto Gains after BoE Officials Acknowledge Improvements
AUD/NZD Price Action Tells it All
AUD – Back to Back Drop in Employment
CAD – Oil Prices Up, Gold Down
USD/JPY Extends Losses, Japanese Portfolio Flow Details

USD – Retail Sales is Last Piece of Data that Could Sway the Fed

With only a week to go before the Federal Reserve’s monetary policy announcement, tomorrow’s retail sales report is the last piece of data that could sway the central bank’s decision. Consumer spending is the backbone of the U.S. economy and even if job growth has been modest, if spending is strong, the Fed can confidently taper asset purchases this month. A solid retail sales report could be just the push that policymakers need to vote for less stimulus. However spending is not expected to be strong – retail sales are expected to rise only 0.5%, up from 0.2% in July. Excluding spending on autos and gas, retail sales growth is forecasted to slow from 0.4% to 0.3%. We believe that the risk is to the upside for the data because according to the Johnson Redbook survey, spending improved last month and even though the International Council of Shopping Centers reported a slowdown, the change was nominal. Unfortunately it would be wishful thinking to expect the data to be so weak or strong that it would make or break the Fed’s decision. In all likelihood, retail sales continued to grow in the month of August, albeit a sluggish pace that will leave the central bank with a very tough decision next week. Unless retail sales rise by 1% or more, we expect the dollar to continue to weaken ahead of the FOMC rate decision. The University of Michigan consumer sentiment report is also scheduled for release and a small uptick is possible.

It was a mixed day for the U.S. dollar, which traded lower against the JPY, higher against the AUD and NZD and unchanged against the EUR, GBP, CAD and CHF. After breaking briefly above 100 earlier this week USD/JPY rejected this level once again. Up until today, there were no U.S. reports on the calendar, which means USD/JPY weakness is a reflection of skepticism and hesitation ahead of next week’s FOMC rate decision. This morning we learned that jobless claims dropped to 292k from 323k, its lowest level in 7 years. For the first time since March 2006, fewer than 300k people filed for jobless claims benefits, which should have been extremely positive for dollar but unfortunately elicited only a small reaction in the greenback. The problem is the data is abnormally low because the Bureau of Labor Statistics said 2 states upgraded their computer networks and some filings were not reported. In other words, we should take the numbers with a grain of salt because “the decrease in filings probably didn’t signal a change in labor market conditions.” So while a sub 300k print in jobless claims seems very impressive, we should expect upward revisions next week. The main takeaway from today’s jobless claims report is the trend is still improving which is good news for the Federal Reserve. The less volatile 4-week moving average dropped to 321.k last week its lowest level since October 2007 and continuing claims also declined. Considering that the data is distorted and fewer firings have not translated into stronger hiring, traders have rightfully shrugged off this report.

EUR – ECB Draghi Expresses Continued Skepticism of Recovery

The euro ended the day unchanged against the U.S. dollar and British pound despite disappointing economic data. Eurozone industrial production dropped 5 times more than expected in the month of July, raising fresh concerns about the region’s underperformance. While the drop was not unexpected given the decline in German and French IP, the magnitude of the deterioration was a bit surprising. We believe that the outlook can worsen, putting additional pressure on the currency and potentially driving the EUR/USD below 1.31 but as we have seen today, the EUR/USD may not be the biggest victim of euro weakness. Instead steeper losses could be seen in EUR/GBP and EUR/NZD. ECB President Draghi spoke this morning and expressed the same amount of skepticism as we heard at the beginning of the month after the ECB meeting. He said the recovery in the Eurozone is still “very very green” and he doesn’t share the market’s enthusiasm for the recovery. Draghi also feels that the rise in money market rates is unwarranted but believes that forward guidance has been successful in guiding rates lower and decreasing volatility. In their monthly bulletin, the ECB reiterated their pledge to keep rates low for an extended period of time. While they said confidence indicators confirm gradual recovery, they “remain particularly attentive to the implications” of a “gradual reduction in excess liquidity.” Meanwhile the Italian Senate has postponed its vote on expelling Berlusconi out of the government to September 18th.

GBP Holds Onto Gains after BoE Officials Acknowledge Improvements

The British pound ended the day unchanged against the U.S. dollar and euro. No economic reports were released this morning and comments from monetary policy officials posed no threat to the currency. We heard from a number of policymakers today including Bank of England Governor Carney, MPC members Miles, Fisher and McCafferty. Their speeches were similar – they all acknowledged the recent improvements in the economy with some saying that the recovery has gained momentum. Everyone also expressed hesitations that ranged from the recovery being very new to the elevated risks facing the economy. While we are can argue that the central bank on balance has grown more optimistic, Carney also made it very clear that they would not change the level of Quantitative Easing until the unemployment rate falls to 7%. When that occurs, the central bank could be prepared to raise interest rates because “BoE tightening will begin with rate increase.” What is interesting is that while he said additional stimulus is possible if the economy needs it, he also added later on that they have “no problem with raising rates if needed.” The BoE believes the 7% level will be reached in 2016 but the market is pricing in tightening in January 2015. On this point, Carney said investors and economists simply disagree. While monetary policy expected to remain unchanged for the foreseeable future, if next week’s economic reports continues to surprise to the upside, we would not be surprised to see the GBP/USD trade at 1.60.

AUD/NZD Price Action Tells it All

The sharp sell-off AUD/NZD today illustrates the divergence in price action and outlook for Australia and New Zealand. By now, everyone should know that labor market conditions in Australia continued to deteriorate last month. The market was looking for job growth to rebound in August after falling in July but unfortunately Australia reported back-to-back job losses. In fact, since May there has only been one month of positive job growth and the increase was so small that no new jobs were created over the past 6 months. This underperformance drove the unemployment rate to its highest level in 4 years. This is terrible news for the Reserve Bank of Australia who may have to reconsider the idea of lowering interest rates. When the central bank met earlier this month, they omitted their easing bias from their monetary policy statement but if jobs don’t come back in September, they may no choice but to ease again. The Australian dollar fell sharply in response to the employment report and we believe there is the possibility of another 1 to 2 cent slide in the A$. In contrast, investors are buying the New Zealand dollar after the RBNZ said interest rates could be increased in 2014. A healthy outlook for New Zealand’s economy and a higher 10-year bond yield versus the Aussie should mean further losses for AUD/NZD. The next support level for the pair is at the July low of 1.12. We expect the NZD to generally trickle higher against the USD and EUR. The Canadian dollar on the other hand ended the day unchanged despite a small uptick in house prices. This has been a quiet week for Canada.

USD/JPY Extends Losses, Japanese Portfolio Flow Details

The Japanese Yen traded higher against all of the major currencies today, extending the losses in USD/JPY. While the currency pair managed to close above 100 this week, its inability to sustain its gains shows just how significant this price level has become. We have long said that in order for USD/JPY to extend higher, U.S. yields need to rise consistently, stocks need to rally and the Japanese need to buy foreign bonds. At one point, all 3 factors were underway but things began to change in August when the Nikkei and S&P 500 sold off and Japanese investors started to sell foreign bonds once again. Last night, we learned that investors in Japan sold foreign bonds for the fourth straight week. While the sales have eased, the lack of demand in the face of rising U.S. yields has made it very difficult for the Yen to weaken. The Ministry of Finance released a more detailed breakdown of Japanese investment flows but the data is from July, a brief period when demand for foreign bonds turned positive. July was the first month this year that investors bought U.S. bonds and their purchases accounted for 78% of foreign bond demand. The rest of the demand was for European bonds while Japanese investors continued to sell their Australian holdings. These numbers are interesting, but we know that much of the flow reversed in the month of August. Meanwhile machine orders were flat in July after falling 2.7% in June. Economists had been looking for a rebound and unfortunately this weakness validates the BoJ’s concerns about capital expenditures. The Cabinet’s monthly economic report is scheduled for release this evening but we do not anticipate any major changes.

Kathy Lien
Managing Director

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