It is pretty astounding that most major of the currencies are unchanged or trading higher against the U.S. dollar this morning because overnight economic reports from Asia and Europe fell short of expectations. German retail sales declined for the second month in a row while industrial production in Japan grew at a much slower pace than economists had anticipated. EUR/USD, GBP/USD and USD/JPY even touched new highs during the Asian trading session before giving up part of their gains in Europe and early North America. Fresh multiyear highs were also seen in the Yen crosses. Part of the reason investor appetite is so resilient is because U.S. stocks are trading at record levels this morning. With no U.S. economic reports on the calendar and many traders still out of the office, currencies and equities are benefitting from the post Thanksgiving, Black Friday buzz.
From a technical basis, the uptrend in most of the major currency pairs remains intact but from a fundamental perspective we can’t ignore the downside surprises in European data over the past 48 hours. Not only did German retail sales drop 0.8% in October (economists were looking for a 0.5% rise) but unemployment rolls increased by 10k last month. Earlier this week, it appeared that Germany would carrying the region to recovery and is a problem in of itself because this is not sustainable but German consumers have now cut spending 4 out of the last 5 months. Consumer spending in France also dropped for the third month in a row by 0.2% and like Germany this represented the fourth monthly decline in five months. It is this weakness in demand that makes us skeptical of the EUR/USD rally because if spending does not rebound in the fourth quarter, the ECB will be forced to seriously consider the need for negative rates.
The Japanese Yen on the other hand extended its losses against the dollar and most of the major currencies this morning but is struggling to hold onto its gains amidst the decline in the Nikkei and weaker industrial production. Economists had been looking for manufacturing activity to rise 2% but it increased a mere 0.5% in the October. The drop in Japanese stocks would have been larger if not for the improvement in production outlooks. Also the manufacturing PMI index increased and consumer prices rose at a faster pace. However the Japanese government still has a lot of work to do if they want to maintain the current level of recovery with spending growth slowing and the jobless rate rising. The general belief is that this slowdown will be temporary because the economy is expected to rebound strongly over the next 4 months.
For the rest of the day, we don’t think anything will compromise the existing movements in currencies and equities. Next week traders need to be more careful because there are a number of important economic reports on the calendar that could determine whether these trends continue or fade.