USD falls after disappointing retail sales

The USD was broadly lower in NY trading after disappointing retail sales figures and a downward revision to the global growth outlook by the International Monetary Fund (IMF). While the cut in the IMF’s GDP projections came as no surprise, US retail sales unexpectedly declined by -0.5% in June. Markets were anticipated growth of +0.2% from the prior -0.2% fall and the data today confirmed three consecutive monthly drops in headline retail sales for the months that make up Q2. With consumption making up a large portion of the US economy, the data is the latest in a string of deteriorating numbers and does not bode well for the economic outlook. Following the release, the dollar slumped, treasury yields fell to near record lows on the 10-years and new record lows on the 5-year yields as markets speculated on the potential for more easing by the Federal Reserve.

Fed Chairman Ben Bernanke is set to testify before Congress tomorrow and on Wednesday and we believe that while he is likely to acknowledge the softening economic activity and slowing growth, Big Ben will refrain from committing to new stimulus measures. We think that Bernanke may reiterate past comments that suggest all options are on the table and the Fed is ready to act if necessary. This may disappoint market participants that are looking for any hint of QE3 and could be supportive of the dollar and see a retracement of today’s moves. Overall, we anticipate price action to be choppy in the medium term as traders search for clarity in terms of policy responses.

In other economic data, US Empire manufacturing for July jumped by more than expected with a print of 7.39 from the prior 2.29 (cons. 4.00) and May business inventories grew by +0.3% which was slightly more than consensus.

In Europe, Spanish Economy Minister Guindos expressed his optimism regarding the progress of Spain’s bailout as he said that he anticipates finalizing the MOU on Friday and sees banks recapitalized within a few months. EUR/CAD rebounded from a record low of around 1.2365 after the comments and ahead of tomorrow’s Bank of Canada rate announcement. We expect the BOC to remain on hold and deliver a more cautious outlook while softening its hawkish stance. This would likely see a weaker CAD, however our longer term outlook is for CAD strength based on the relative monetary policy stance as nearly all other major central banks are currently engaging in easing measures. (See our note: Bank of Canada to hold).

U.S. equities declined with the DJIA1 and the S&P 5001 finishing the day lower by -0.39% and -0.23% respectively. Precious metals were relatively flat on the session and WTI crude1 is higher by about +1.31% at time of writing on the back of a weaker dollar.

Due out tonight are New Zealand 2Q consumer prices and the Reserve Bank of Australia’s Board minutes for the July meeting. The tone of the minutes is likely to be the main driver of AUD in the upcoming session.

Source: Forex.com

16.07.2012