Will Weak Holiday Spending Hurt the Dollar?

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The U.S. dollar is trading slightly higher against many of the major currencies this morning after erasing earlier losses. Investors initially sold dollars when China announced plans to gradually expand the Yuan’s trading band and eventually transition to a managed floating exchange rate. The detailed breakdown of China’s basket peg is unknown, but the U.S. dollar is widely believed to account for the majority share and a wider trading band means that China needs to buy fewer dollars. In order to safeguard the recovery however, the process will be extremely slow which explains why the reaction in the foreign exchange market did not last. USD/JPY is back above 100 and EUR/USD is struggling to hold 1.35. With U.S. yields on the rise and stocks turning lower after rejecting key levels on Monday, the dollar picked up a bid although that is beginning to change at the time of publication.

With retailers announcing their Black Friday sales early, investors are starting to look ahead to this year’s holiday shopping season. The U.S. retail sales report is scheduled for release on Wednesday and if spending contracts for the second month in a row, the U.S. will need consumers to spend voraciously this season for the Federal Reserve to seriously consider tapering this year. Based upon today’s reports from the International Council of Shopping Centers and Johnson Redbook surveys, retailers will need to fight hard for each sale. Not only do we have a late Black Friday but consumers have become extremely deal conscious. According to Bloomberg, this could be the weakest holiday shopping season since 2009. Stores have too much inventory, retailers are discounting heavily and introducing a number of incentives to boost sales. Wal-Mart for example is introducing its lowest rate flat screen TV (one of its biggest Black Friday promotions) at 33% less than last year. Malls are luring in consumers with free parking and coffee while online retailers have introduced same day delivery for as little as $3.99 per shipment. A weak holiday shopping season could hurt the market’s appetite for dollars and the first test will be tomorrow’s retail sales report followed by Black Friday and Cyber Monday sales.

Meanwhile Federal Reserve President and FOMC voter Evans is speaking later this afternoon and this evening Bernanke will be discussing communication and monetary policy before the Economics Club in Washington. Considering that he is speaking at a dinner, a Q&A session is unlikely. We don’t expect any surprise comments on monetary policy.

Kathy Lien
Managing Director

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