Currencies are on the move this morning following a flurry of economic data, event risk and comments from a “G7 source.” If the G7 is attempting to clarify their stance by saying more about exchange rates, they are failing abysmally because instead they have created more confusion and uncertainty. According to the “G7 source, while ” yesterday’s statement was aimed at the speed of Yen appreciation, the G7 are less concerned about the level of the Yen.” Considering that the G20 meeting is the main focus, the G7 should limit their comments ahead of the broader gathering particularly since investors are watching this month’s G20 statement very carefully.
The focus on the G20 and the so-called “currency wars” overshadowed this morning’s U.S. economic reports. Retail sales growth slowed to 0.1% in the month of January, down from 0.5% in December. While this increase was in line with expectations, excluding sales of autos and gas, consumer spending rose a mere 0.2% last month, compared to a forecast for 0.4% growth and a prior reading of 0.7%. The data shows that Americans have cut back spending after the holidays due in part to the impact of a 2% increase in payroll taxes. This is a tough start to the year for U.S. retailers but hopefully the recent performance of equities will support spending in the months forward. Import price growth also fell short of expectations, rising 0.6% compared to a 0.8% forecast. Prices were also revised down from -0.1% to -0.5% in December. Today’s soft economic reports are exactly the reasons why the Federal Reserve needs to keep monetary policy easy for the foreseeable.
Meanwhile the GBP is getting pounded by the dovish comments from Bank of England Governor Mervyn King who spoke after the release of the Quarterly Inflation Report. While the central bank raised its CPI forecast, King painted a dour picture of the U.K. economy that is consistent with an accommodative monetary policy. The Australian dollar on the other hand benefitted from stronger consumer confidence numbers while the euro was supported by a nice increase in Eurozone industrial production.