Week in FX Americas – Bullard and G20 Beat Down Dollar

The near global equity meltdown last month (later reversed) was not able to seriously damage Friday’s U.S. retail sales report for October. Overall, retail sales rose +0.3% on the month and managed to just beat analysts’ expectations of a +0.2% headline print. Digging deeper, ex-auto sales came in at +0.3%, while control sales (excluding the most volatile components — autos, gas, food, and building material) rose +0.5%.

Monthly Revisions a Boon

Friday’s headlines saw no revisions to September’s disappointing -0.3% print, but perhaps more importantly, ex-autos and control sales were each revised up to flat from -0.2%. Even the August core was revised up a tenth to +0.5% from +0.4%. The overall positive prints would suggest that the U.S. consumer (the Federal Reserve’s backbone) is heading into the final quarter of 2014 with some confidence and momentum. With better data like this, do not be surprised to see some upward revisions to both third-quarter and fourth-quarter estimates. Year-on-year growth climbed to +4.4% from +4.3%, while the core rose to +3.6% from +3.5%.

It’s a fact: U.S. consumers are feeling great about their nation’s economy. The Thomson Reuters/University of Michigan sentiment index released this morning rallied to another seven-year high (89.4 versus 86.9) in November. The jump was seen mostly in current conditions rising to 103 from 98.3 in October. Expect the price of energy to be the massive game change catalyst.

Dollar Love-in Was Brief

As expected, the solid U.S. sales print gave the dollar a bid, allowing it to climb against all of its 16 major peers. It briefly strengthened to another seven-year high against the yen (¥116.72), while also attempting to take out this week’s EUR/USD lows (€1.2411) as EUR/US spreads struggled to widen. With Treasury prices falling, again pushing U.S. yields higher (U.S. 10-years at +2.36%) made the buck more attractive. The combination of modestly better data had some fixed-income traders trying to flatten the short to middle of the U.S. yield curve — preempting the Fed’s first rate hike. Nevertheless, with this week’s modest investor and dealer participation, the market would always have trouble maintaining the dollar’s upward momentum as we close out the week.

The Dollar’s U-Turn

Not helping the greenback on Friday were comments made by James Bullard, the Federal Reserve Bank of St. Louis president, and this weekend’s Group of 20 meet. Bullard is worried about the impact of a gradual U.S. rate hike. With wages a lagging indicator for inflation, he does not expect to see a surge in wage gains, which creates little inflation pressures or the need for aggressive rate rise. Traders holding long-dollar positions want to unwind them before the G-20 pow-wow. This has diminished all the good that U.S. sales data was able to do for the dollar. This market continues this week’s trend of being happy to cash in on long dollar profits.

Do not be surprised if market prices happen to close out the week topping the intraday dollar lows. A stronger dollar is trying to put gold on the back foot ($1,148, down $13) despite the upcoming Swiss gold referendum on November 30. The Swiss National Bank (SNB) may be required to beef up its gold reserves from the current +8% to +20%. The SNB also seems to be quietly and aggressively protecting its three-year old CHF “floor” at €1.2000. The market supposedly has a lot of EUR bids to chew through first. Potential event risk should be capable of providing some support for the yellow metal as the market closes in on the eventual vote.

What to Expect Next Week

Throughout this week, the market seemed to be rather content in taking some long USD profits off the table after the October U.S. headline nonfarm payrolls print missed expectations (+217k versus +223k). U.S. dollar bulls continue to look for the catalyst to push the dollar to the next level. With time running out as we approach the holiday season, both dealers and investors may prefer to keep their powder dry until after the New Year.

On Sunday, the Kiwis will get things underway with retail sales data; in pursuit will be Japanese trade numbers. Central bank speakers again will dominate the week, starting on Monday with the European Central Bank’s Mario Draghi, followed by the Reserve Bank of Australia’s (RBA) Governor Glenn Stevens and the RBA’s monetary policymakers’ meeting minutes. Tuesday, the Bank of Japan delivers its monetary policy statement and follows it up with a press conference.

The BoE’s and the Federal Open Market Committee’s meeting minutes will dominate Wednesday. EUR flash manufacturing and inflation numbers occupy Thursday; while Friday rounds out the week with Draghi speaking at the 24th European Banking Congress, themed “Reshaping Europe,” in Frankfurt.

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