The dollar staged a sharp rally after it was reported that Retail Sales came in better than expected, to some extent confirming last week’s stellar job numbers. USD/JPY quickly reversed direction, rallying more than 1.0% as a result. Early trading sees all major pairs losing ground against the dollar except for the aussie and kiwi. The immediate reaction to the good news continues a new pattern that started with the report on Non-Farm Payrolls. Good U.S. data has translated into dollar strength, rather than a pick-up in high-beta currencies.
Retail Sales gained 1.3% in the month of November, more than doubling estimates. Meanwhile, purchases excluding automobiles surged by the most since January. Sales were broad based, driven mostly by purchases of electronics and building materials. The increased electronic spending indicates that the consumer has returned, at least for the holiday season. The most important factor about this report is that it provides confirming evidence that the labor market has reached a turning point. Last week, Bernanke described his skepticism about the health of the economy, citing that more sustained evidence is needed to support optimistic conclusions. It seems that Retail Sales is the first step in fulfilling Bernanke’s wishes.
Keep in mind that the University of Michigan Consumer Confidence report is expected later this morning. The mounting evidence for labor stabilization and increased spending suggests that confidence has improved.
Chinese economic data continued to show strong economic expansion giving lift to the recovery trade and improving risk flows in late Asian and early morning European trade. Chinese Industrial Production expanded at a very strong 19.2% rate versus 18.2% eyed while inflation rose by 0.6% - the first increase in ten months indicating that deflationary pressures are receding.
Although other measure of economic activity such as Trade Balance (19.1B vs.24.0B) and Retail Sales (15.8% vs. 16.6%) were lower than forecast, the overall tone of the data was overwhelmingly positive demonstrating that China continues to expand strongly and remains the primary engine of global growth.
The news sparked a small bid in high beta FX with euro climbing to 1.4750 and pound recovering the 1.6300 handle as the night progressed. Cable also benefited from Moody’s announcement that it will not downgrade UK sovereign debt helping to relieve some of the concerns that have dogged the pair this week.
Attention will now turn to the US Retail Sales data due 13:30 GMT. The market anticipates core Retails Sales to rise by 0.5% from 0.2% the period prior and if the news surprises to the upside it should support the continuation of the overnight flows with USD/JPY possibly targeting 90.00 figure once again.
A bearish Gartley is forming on the CAD/JPY. So far this pattern is moving very symmetrically in time, but it's price symmetry isn't quite as strong. The trade would also enter near the bearish trend line on the Daily Chart. The trend line doesn't line up perfectly, but at least there is a bearish trend line in the vicinity of the entry. We have also circled a significant low that could provide additional resistance if the pair continues to rise to our entry.
We are looking to sell the CAD/JPY if it rises to 84.57 (Point D). Point D is located at the convergence of the following points:
61.8% Fibonacci retracement of XA.
161.8% Fibonacci extension of BC.
AB=CD.
Bearish trend line on the Daily Chart.
Significant low circled on 1hr Chart
This is a fairly straightforward trade so we will jump into possible red flags that could invalidate this trade. We will watch for long bars in the CD leg. Although the trade is near entry, we could still have a long bar to complete the trade. Also, the pair could still drop before entering and then rise to the entry with long bars. If the pair comes within 12 pips of reaching our entry, does not enter, and reaches T1 before entering, the trade is invalid. The trade is also invalid if the pair falls below 83.15 before hitting our entry.
To recap, we will look to sell the CAD/JPY at 84.57 with our stop placed at 84.89. Our initial profit targets are 84.09 (38.2% of CD) and 83.69 (61.8% of CD).
The mixed performance of the U.S. dollar today reflects the consolidative mode in the forex market. Traders are waiting for Friday’s retail sales report to see if the turn in the labor market has been accompanied by a turn in consumer spending - because fewer job losses mean nothing if they do not encourage American consumers to part with their dollars. Although the greenback retreated against the commodity currencies, it rose against the euro and Japanese Yen while the British pound remained virtually unchanged. This performance suggests that most traders still want to sell dollars on the hopes that the unambiguously strong non-farm payrolls report last month truly reflects the state of the economy. There is also round of heavy economic data from China this evening. As we have seen in the past, Chinese economic data moves not only the currency markets but also equity markets. With industrial production, retail sales, CPI/PPI and trade numbers are for release, expect a busy night.
Will Consumers Step Up?
The U.S. retail sales report is traditionally one of the most important event risks for the U.S. dollar because consumer spending is the backbone of the U.S. economy and constitutes more than 70 percent of GDP. However this month’s report is even more significant because November is usually a big month for spending because of the holidays. Also, the sharp improvement in the non-farm payrolls report has turned the dollar around but there has been a lot of speculation about the sustainability of those numbers and the recent warning from Ben Bernanke certainly does not provide a vote of confidence for the dollar. Therefore everyone will be looking to the retail sales numbers to see if consumers stepped up in the month of November. Based upon current market forecasts, retail sales are expected to rise for the second month in a row, albeit at a slower pace. Spending on Black Friday and Cyber Monday were stronger than the previous year but consumers are definitely clicking the mouse more often than they are walking into the stores. Black Friday sales increased 0.5 percent while Cyber Monday sales increased 5.0 percent. However despite these healthier numbers, there have been disappointments. Luxury retailer Saks Fifth Ave reported a 26 percent drop in sales while teen retailer Abercrombie and Fitch reported a 17 percent drop. Macy’s and JC Penny both reported monthly sales declines of approximately 6 percent. Based upon the 6 percent rise in sales of Costco and the 3 percent rise in sales at Kohl’s, American consumers are definitely trading down. Therefore we believe that the risks lie with a weaker retail sales report and a disappointing consumer spending report should be dollar bearish. The primary reasons why retail sales are expected to increase at all aside from holiday spending are gas prices and auto sales. A gallon of gasoline averaged above $2.60 the entire month of November, about 10 cents higher than the previous month and even though the cash for clunkers program ran out, car sales are expected to remain steady. If retail sales surprises to the upside like the non-farm payrolls report, the dollar could incur some new upside momentum.
Currency Traders Not Impressed by Stronger Trade Data
After 3 days of little to no U.S. economic reports, the market's focus finally returns to the U.S. economy with the release of trade numbers and jobless claims. The latest trade numbers finally reflect the positive implications of a weaker dollar but unfortunately currency traders were not impressed. In the month of October, the trade deficit fell 7.6 percent to $32.9 billion as exports reached the highest level in more than a year (Nov 2008). Trade with China was particularly strong with exports reaching a record $6.9B which tells us that the U.S. has also been a beneficiary of the recovery in China. Imports increased by only a modest 0.4 percent on demand for computers and autos. The number of barrels of crude oil that was imported in October was the fewest since January 2000. Traders were also disappointed by the rise in jobless claims and the drop in continuing claims. The number of Americans filing for first time unemployment benefits increased 17k to 474k last week. We are not worried about the rise in weekly claims because they can be cyclical and remain at healthy levels. However we are a bit worried by continuing claims which dropped from 5.46M to 5.157M because they reflect expiring benefits.
EUR/USD: ECB REMAINS HAWKISH, SNB HEADS FOR EXIT
The euro ended the day unchanged against the U.S. dollar on the heels of mixed economic data. Wholesale prices increased 0.7 percent last month, reflecting stronger inflationary pressures within Germany. However non-farm payrolls and industrial production fell more than expected in France. Traders are still reeling from the credit downgrade of Greece and are now wondering whether Ireland will follow suit. This morning, the release of the European Central Bank’s monthly Bulletin was accompanied by a slew of comments from ECB officials. In two separate speeches, ECB President Trichet said the current interest rate is appropriate and even though current conditions now allow for an exit from some excess measures, their decision on an exit is not a rate signal. Traders need to realize that Trichet is trying to stress to the market that unwinding their easy monetary policy measures puts them closer but still very far away from raising interest rates. Every ECB member from Nowotny to Mersch have said that the central bank needs to be very careful with implementing an exit strategy. Meanwhile the Swiss National Bank has joined other central banks headed for the exit. This morning, the SNB left interest rates unchanged at 0.25 percent and announced that they will stop bond purchases but continue currency purchases. In other words, they will continue to intervene in the forex market if the Swiss Franc strengthens excessively but at the same time, they believe that the economy has improved enough for them to stop pumping money into the economy via asset purchases. The SNB believes that the recovery remains fragile and there is considerable uncertainty in the economic outlook and therefore it wouldn’t be appropriate to raise rates at the moment. However the current level of monetary policy cannot be maintained indefinitely especially as demand for loans has stabilized. The SNB’s aim right now is to prevent franc gains and they have buying both euros and U.S. dollars to stop their currency from rising. Based upon the tight range that EUR/CHF has been trading in for the past 4 months, their currency intervention has been successful.
GBP/USD: NO LOVE FROM BOE
The British pound ended the day unchanged against the U.S. dollar and euro. As expected, the Bank of England left monetary policy completely from interest rates to the level of Quantitative Easing unchanged. Based upon the Monetary Policy Committee’s statement that the “scale of the program will be kept under review,” the central bank is leaving their options open. The Monetary Policy Committee believes that the quantitative easing program needs a “natural” assessment before any measures are taken which suggests that the next big decision on the program will not be until the Quarterly Inflation Report is released in February. Despite being one of remaining industrialized nations still easing, there is a limited amount of options left. The country is running tremendous fiscal and current account deficits which may subject the country to a downgrade in credit rating. Furthermore, prospects of additional unconventional monetary stimulus will put a strain on the value of the Pound. Moody’s Rating Service warned the U.K., to cut down their budget or face possible revision of Triple-A rating. The U.K.'s pre-budget report did little to pin point how the country would manage its deficit and the government’s decision to levy a 50 percent tax on bankers bonuses is causing a stir. Friday's U.K. producer price index will provide more color on inflationary conditions but will fail to impact the BoE’s monetary policy stance.
AUD/USD: JOB GROWTH IN FOUR OUT OF FIVE MONTHS
The New Zealand dollar continues to be one of the best performing currencies in the forex market. On Thursday, Reserve Bank of New Zealand Governor Alan Bollard’s hawkish comments led investors to speculate on eventual rate hike in mid-2010. The Australian and Canadian dollars are also performing well on the heels on strong economic data. Unlike the U.S., Australia reported positive job growth for the fourth time in five months. A total of 31.2k Australians found new work last month with 99 percent of them finding full time work. As a result, the unemployment rate dropped from 5.8 to 5.7 percent, which was a big surprise considering that the market had expected the unemployment rate to increase and for job growth to rise by a meager 5k. A gas venture in Western Australia is expected to generate another 10,000 jobs early next year. Naturally, this has spurred speculation of another rate hike from the Reserve Bank of Australia. Last night RBA Deputy Governor Debelle said the RBA is not worried about the size of the carry trade market which can be interpreted to mean that he is not worried about the current level of the Aussie. Meanwhile the Canadian dollar benefitted from news that Canada experienced a trade surplus in the month of October. The country's trade balance unexpectedly swung to a C$428 million trade surplus on stronger demand for energy and metals. Exports increased 3.4 percent while imports fell 0.8 percent. No economic data are expected from the commodity countries this evening but they could be affected by any surprises in the Chinese economic reports.
USD/JPY: CONSUMER SPENDING FIGURES ON TOP
The Yen crosses were virtually unchanged as traders try to analyze the state of the world’s economy amid mixed data. Surprisingly, the Yen does not seem to be an ideal carry trade play despite lowest interest rates in G10 universe. Other frequently trading currencies with higher interest rate yields are reluctant to generate a substantive rally before the year end. Despite managing to escape recession in the last quarter, economic conditions remain dire in Japan. Core Machine Orders dropped 4.5% compared with September, indicating that companies are reducing capital spending. The following puts an additional strain on the economy which seen the 3rd Quarter GDP figures being revised to a third of initial estimate. In response to the drastic revisions, the government officials are proposing new ways to calculate the GDP. Japan’s preliminary GDP data is incomplete when it is released, missing nearly half of the components of capital spending. The last thing that the newly elected government wants to experience is a double dip recession amid a deflationary spiral. The traders will closely monitor Consumer Confidence figures released later in the evening.
GBP/USD: Currency in Play for Next 24 Hours
The currency in play for the upcoming 24 hours is the GBP/USD. The UK will release their Producer Price Index at 9:30GMT or 4:30AM EST. The U.S. will release retail sales at 13:30GMT or 8:30AM EST, followed by the U. of Michigan Confidence at 15:00GMT or 10:00AM EST. For the past 3 weeks, the British pound has been grinding lower and the currency par is now trading in sell zone, which we determine using Bollinger Bands. The closest level of support is 1.6207, Wednesday’s low and the 23.6% retracement of this year’s low and high. A breach of that level opens the door for a move to 1.60. However if the GBPUSD manages to rise back above 1.6415, which would require a break of the 50 and 100-day SMA, the downtrend would be broken.
