Will Retail Sales Tip The Odds of Fed Rate Hike?

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Market Drivers Aug 13, 2015

EUR gives up nearly half of yesterday’s gains
CNY devalued for third strait day
Nikkei 0.99% Europe 1.29%
Oil $43/bbl
Gold $1118/oz.

Europe and Asia:
AUD Inflation exp. 3.7% vs. 3.4%
EUR GE Final CPI 0.2% vs. 0.2%

North America:
USD Retail Sales 08:30

USD Weekly Jobless 08:30

USD Business Inventory 10:00

For the third day in a row the PBOC set its reference rate for the CNY lower at 6.4010 devaluating the unit by another -1.1%. Overall the yuan has depreciated by more than 4.5% since Tuesday as Chinese central bank continues to adjust exchange rate in response to slowing economic conditions at home.

The news caused yet another bout of volatility in Asian session trade but the turbulence was much more short lived as currency markets have started to adjust to the new policy from PBOC. Still a good chunk of yesterday’s short covering rally was unwound with dollar especially strong against the euro.

Yesterday the EUR/USD verticalized against the greenback popping nearly 200 points in a relentless short squeeze as markets unwound their bets that the Fed would hike rates by September. The news of CNY reval has only highlighted the fragile state of the global economy and caused most of the market participants to rethink their Fed rate hike projections.

Yet while the euro gained on the unwind the move was clearly a short covering squeeze as the slowdown in China could hurt Europe even more, especially Germany which remains the export driven engine of the region and which now faces difficult markets in Russia, Middle East and China as global demand wanes.

While some dollar bulls continue to argue for a September hike, there is a growing consensus that the Fed is likely to delay any action given the uncertainty in global markets and the lack of any evidence of inflation in PCE readings. One other key factor that could affect the decision is the less that stellar state of the US consumer. Despite lower oil prices and steady job gains, US consumer sentiment has deteriorated over the past few months. More importantly, the Retail Sales numbers have missed their mark five out the last six months. Although some analysts have argued that the figure may be muted by purchase of large ticket items such as cars and home improvements the near term trend does not support a move towards tightening at the present time.

That’s why today’s US Retail Sales number could be key to the near term direction for the buck. The market is looking for a rebound to 0.4% from -0.1% the month prior. Any reading that’s in line or better could validate that bullish view that job gains are finally translating into consumer spending. However yet another miss and worse a negative month over month reading would be the nail to the coffin for any prospect of September rate hike. USD/JPY has recovered a good chunk of yesterday’s losses trading at 124.56 in midday London dealing, but any miss of the mark in today’s Retail Sales report could quickly send it back below the 124.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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