Will US Retail Sales Save the Dollar?

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Daily FX Market Roundup 06-12-13

Will US Retail Sales Save the Dollar?
NZD – RBNZ Leaves Policy Unchanged, Soft Warning on Intervention
AUD – All Eyes on Employment
CAD – Sharp Rise in House Prices
EUR – Lifted by Stronger Data
GBP – Labor Market Conditions Improve

Will US Retail Sales Save the Dollar?

Over the past 4 weeks, the U.S. dollar struggled against the world’s 3 most actively traded currencies – the EUR, GBP and JPY. Despite stronger job growth, the sustainability of the U.S. recovery led many investors to wonder if the Federal Reserve plans to taper asset purchases prematurely. We have heard a growing number of Federal Reserve Presidents throw their support behind a reduction in Quantitative Easing but rather than rally, the U.S. dollar and U.S. equities sold off. Part of the reason for deleveraging is because investors are worried that U.S. companies and the U.S. economy overall will suffer from a reduction in stimulus. If the U.S. economy was on firmer footing talk of tapering asset purchases could be positive for the dollar because the U.S. economy would be better equipped to handle a reduction in stimulus. It is for this reason that Thursday’s retail sales report is important. If the data shows that stronger job growth has translated into stronger consumer spending, the dollar could extend its recovery, lifting equities in the process.

In order to “save” the dollar however, retail sales would need to rise by more than 1.5%, or the strongest pace in 3 years. While we have good reasons to believe that consumer spending increased in the month of May based on stronger reports from the International Council of Shopping Centers and Johnson Redbook, we are not sure whether there is enough momentum in the U.S. economy to drive such a large increase in spending but then again it is not out of the realm of possibility because U.S. stocks hit a record high in May and growing financial wealth could bolster consumer spending. U.S. retail sales will play a big role in how the dollar and the FX market in general behaves on Thursday but aside from this release, we also have weekly jobless claims, which are expected to remain low.

Meanwhile today has been a day of recovery in the FX market with most of the major currency pairs rebounding or stabilizing after their recent declines thanks in part to defensive measures by emerging market central banks. While G10 central banks are sitting on the sidelines watching the volatility in the currency, equity and bond markets, central banks in emerging market economies have sprung into action. Indonesia raised interest rates by 25bp to boost the rupiah, which dropped almost 5% in the past 12 months. Poland decided to intervene directly in the currency market to drive the Zloty lower against the EUR for the first time in 2 years and Turkey’s central bank introduced a series of liquidity tightening measures to calm the volatility. They held five $50 million forex-selling auctions and threated to intervene directly in the foreign exchange market. These central banks finally realized that they can’t just sit around and wait for the larger players to take action – they have to take their fate into their own hands and control volatility in their local markets.

NZD – RBNZ Leaves Policy Unchanged, Soft Warning on Intervention

The New Zealand dollar ended the day higher against the greenback but gave up part of its gains after the Reserve Bank’s monetary policy decision. While the RBNZ left interest rates unchanged at 2.5%, they cut their 2014 growth forecast from 3.3% to 3%, talked about how the currency is overvalued and warned that they could intervene in the currency market. However this was not enough for currency traders who may have been hoping for more dovish comments or intervention talk. Instead, Wheeler said they may “take tops off dollar peaks where possible” which suggests they would only intervene covertly to weaken the currency. There were little fireworks from the RBNZ which leaves the market’s focus on Australian employment numbers scheduled for release later tonight. After a very strong month of job growth, economists are looking for net job losses in the month of May. The PMI numbers have been mixed so it will be difficult to tell which way the data will swing. The manufacturing and construction sectors saw improvements in labor market conditions but the service sector saw deterioration. Based on the improvement in consumer and business confidence, we would not rule out an upside surprise. The AUD is deeply oversold and is behaving like a wounded animal. Good data would drive a much needed short-squeeze whereas a disappointing jobs report could take the pair down to a fresh 2.5 year low. The Canadian dollar on the other hand traded lower against the greenback despite an uptick in oil prices and better than expected data. The Teranet housing price index surged 1.1% in May, the third straight month of improvement, reflecting additional strength in Canada’s economy.

JPY – BoJ Upgrades Economic Assessment Slightly

This is the second time USD/JPY made a run for 95 and failed. While the currency pair did not drop as low as it did earlier this month, it came within striking distance of this key level. Whether this level breaks or not will now hinge on the U.S. retail sales report. The Yen ended the day unchanged against the U.S. dollar and lower against all of the major currencies except for the Canadian dollar. This performance is of course surprising considering that Canadian data surprised to the upside yet again. The latest reports out of Japan were mixed with inflationary pressures rising at a slower pace according to the CGPI index but machine orders fell at a faster pace in the month of May. Nonetheless the central bank maintains a healthy outlook for their economy. In fact they upgraded their assessment of the economy in their monthly report. Back in May, they said the economy “has started picking up.” This month, they said it “has been picking up.” This may only be a change in semantics but this mild shift suggests to us that the BoJ feels that the recovery has become more sustained. The Ministry of Finance’s report on portfolio flows is due for release this evening. Last week we learned that Japanese investors sold another 1.17 trillion yen worth of foreign bonds, the largest amount since April 2012. Without the Japanese shifting their funds abroad, the Yen will have a very tough time falling.

EUR – Lifted by Stronger Data

The Euro strengthened against the US dollar today thanks to an increase in Euro-Zone industrial production that adds to the speculation that the Eurozone economy may be coming out of its stump although economists forecast a dull second quarter. Production of capital goods grew 2.7% and non-durable consumer goods increased 0.7% but durable consumer goods dropped by 2.7%. Energy decreased by 1.5%. Industrial production rose in ten member states of EU and fell for eleven. German consumer prices remained unchanged at 0.3% month to month and 1.5% year over year. The revised GDP data last week kept it in negative terrain for the past six quarters. Tomorrow the ECB will publish its monthly report and it will most likely echo the cautious optimism that we heard from Draghi after the last monetary policy meeting.

GBP – Labor Market Conditions Improve

The British Pound traded higher against the U.S. dollar and euro on the back of better than expected jobs numbers. News that UK jobless claims declined more than anticipated adds to the confidence that the UK economy is having a good second quarter. Jobless claims decreased by 8600 in May when it was expected to drop by only 5000. The claimant count remained unchanged at 4.5%, which was predicted by economists. Average weekly earnings rose excluding bonuses by 0.9%, including bonuses it gained 1.3%. Despite recent economic data that suggests the UK economy is picking up momentum, Bank of England policymaker Paul Fisher said that the economy remains vulnerable to risks. He warned that growth will likely remain weak in the near term and the economy will take a longer time to recover than the US. Fisher says he’s “not happy with unemployment where it is and not happy about growth being as slow as it is. Growth is going to be slow for a long time. The second quarter as it happens looks very good but these things will slip from one quarter to another.”

Kathy Lien
Managing Director

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