Article / 15 February 2011 at 14:26 GMT

USD higher after poor Retail Sales data

Head of FX Strategy / Saxo Bank

Is poor retail sales data out of the US good or bad for the greenback? Also, GBP on a rocket ride despite in-line inflation data for January as market continues to look beyond BoE’s insistence that the high inflation levels may be temporary.

UK inflation 
The UK CPI was far higher than expected, with the core CPI arching above 3.0% - especially noteworthy since last January, the CPI was also at 3.1% YoY, meaning that prices have risen more than 6% at the core over January 2009 levels. Governor King wrote yet another level to parliament suggesting that the the Bank still wants to look through the high inflation levels at present, saying that inflation is “about as likely to be above the target as below it two to three years ahead”. But the market decided to more or less ignore Mr. King and respected the data, so UK STIRs traded off a few ticks on the news and the pound made strong gains almost across the board.

Hawkish Riksbank
The Swedish Riksbank raised rates 25 bps to 1.50% as expected, and managed to one-up the market by further feeding expectations for future rate hikes. The interest rate on 2-year Swedish government bonds is already over 2.1% and the latest rhetoric from the Riksbank has EURSEK trying below 8.75 for the first time in over a decade. The Riksbank said that the repo rate needs to be raised “somewhat faster” and economic projections were generally higher. Governor Ingves said that “The whole point of a flexible exchange rate is to have the option, through monetary policy, to set rates in such a way that the rate setting here is adjusted to Swedish conditions.” This all sounds hawkish, but Mr. Ingves also said the exchange rate “deviated significantly” from Riksbank expectations, there were two dissenting votes, and the market is already gu. The SEK rally may soon run out of oxygen, particularly if major equity markets every rediscover that curious phenomenon known as a “consolidation” or “correction”.  The SEK has been at the top of the G-10 heap so far this year, trading at the highest level versus the rest of the G-10 since around the time of the Lehman bankruptcy.

Odds and ends
The RBA minutes saw the current cash target described as “slightly restrictive” and no worries on the inflation front (“consumer caution easing price pressures”). Weak retail spending was also noted as an offset to strong trade numbers. All in all, the minutes underlined the recent downshift in Stevens’ rhetoric and support the view that RBA policy is peaking (year-forward rate expectations are only slightly more than 30 bps now). AUD would normally be very sharply weaker on such rhetoric, but the new record high in copper prices and major equity markets within a fraction of a percent of multi-year highs is providing some (artificial?) support.

The Bank of Japan left rates unchanged as expected, but upgraded its view on the economy for the first time in nine months. It will take an awful lot to even budge BoJ expectations, however, and as long as interest rates are headed higher, the JPY will suffer it seems. USDJPY was trying at recent 83.70 resistance as we write this and the next levels of interest are the 84.50 multi-month high and then the 200-day moving average just above 85.00.

US Retail Sales was very weak, with the ex Autos and Gas number at a meager 0.2% MoM, which could really be a negative number in terms of real demand, if we consider how poorly inflation is being accounted for in US statistics. But is this USD bearish? So much of US consumption goes straight into the trade deficit number, so weak US consumption actually suggests an improvement in global imbalances. Regardless, this number challenges the break higher in USDJPY because of the reaction in the bond market (strong rally) in the immediate wake of the data. Of course, there is also the whole tiresome “weather angle” on this data - so let's see how we are doing come March/April.

The first major regional US manufacturing survey of the month, the US Empire Manufacturing, was in line with strong expectations. The Prices/Paid breakdown at 45.8/16.9 in Feb. vs. 35.8/15.8 in Jan. shows continued margin pressure on cost push inflation from raw materials costs, but the New Orders was still a relatively strong 11.8 vs. 12.4 in Jan.. On the negative side, the Number of Employees index slipped to 3.61 from 8.42

Looking ahead
Watch out for US NAHB Housing Market Index later in the day. This is the leading indicator on the US housing market, and it has been going nowhere fast. Also up, we have the US weekly ABC confidence number after the close of the equity market, a number that has a bit more focus than usual after the very sharp plunge last week. Again, the confidence surveys and the real state of the job market are inseparable indicators.

Tomorrow we have the BoE inflation report – will there be enough in that report to see GBP tack on to its sharp gains today? Also up tomorrow are US PPI, US Housing Starts and Building Permits and most importantly, the FOMC Minutes later in the day.

Economic Data Highlights

  • China Jan. Producer Price Index rose 6.6% YoY vs. 6.2% expected and 5.9% in Dec.
  • China Jan. Consumer Price Index rose 4.9% YoY vs. 5.4% expected and 4.6% in Dec.
  • Japan BoJ left rates unchanged at 0.10% as expected
  • China Jan. New Yuan Loans out at 1040B vs. 1200B expected and 481B in Dec.
  • Germany Q4 GDP out at 4.0% YoY vs. 4.1% expected and 3.9% in Q3
  • Sweden Feb. Riksbank hiked interest rate 25 bps to 1.50% as expected
  • Norway Jan. Trade Balance out at +36.5B vs. 35.6B in Dec.
  • UK Dec. DCLG House Prices rose +3.8% YoY vs. +2.8% expected and 4.0% in Nov.
  • UK Jan. CPI out at +0.1% MoM and +4.0% YoY, both as expected
  • UK Jan. Core CPI rose +3.0% YoY vs. +3.1% expected and +2.9% in Dec.
  • UK Jan. RPI out at +0.3% MoM and +5.1% YoY vs. +0.2%/+5.0% expected, respectively and vs. +4.8% in Dec.
  • EuroZone Q4 GDP out at +0.3% QoQ and +2.0% YoY vs. +0.4%/+2.1% expected, respectively and vs. +1.9% YoY in Q3
  • Germany Feb. ZEW Survey out at 15.7 vs. 20 expected and vs. 15.4 in Jan.
  • EuroZone Feb. ZEW Survey out at 29.5 vs. 28.5 expected and 25.4 in Jan.
  • EuroZone Dec. Trade Balance out at -2.3B vs. -0.2B expected and -3.2B in Nov.
  • US Feb. Empire Manufacturing out at 15.43 vs. 15.0 expected and 11.92 in Jan.
  • US Jan. Import Price Index out at +1.5% MoM and +5.3% YoY vs. +0.8%/+4.4% expected, respectively and vs. +5.1% YoY in Dec.
  • US Jan. Advance Retail Sales out at +0.3% MoM and +0.2% MoM ex Autos and Gas vs. +0.5%/+0.4% expected, respectively
  • US Dec. Total Net TIC Flows out at +$48.2 vs. +$43.7B expected and $35.6B in Nov.
  • US Dec. Net Long-term TIC Flows out at +$65.9B vs. +$40B expected and +$85.1B in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Fed’s Pianalto to Speak (1500)
  • US Fed’s Tarullo to Speak (1500)
  • US Dec. Business Inventories (1500)
  • US Feb. NAHB Housing Market Index (1500)
  • US Weekly API Weekly Crude Oil and Product Inventories (2130)
  • US Weekly ABC Consumer Confidence (2200)
  • Australia Dec. Westpac Leading Index (2330)
  • UK Jan. Nationwide Consumer Confidence (0001)
  • Australia Jan. New Motor Vehicle Sales (0030)



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