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U.S. Dollar In Tug Of War Ahead Of Retail Sales

Published 08/14/2020, 03:25 AM
Updated 07/09/2023, 06:31 PM

For the greenback, Friday’s U.S. retail sales and University of Michigan consumer sentiment index are the most important economic reports on this week’s calendar. Investors have been looking forward to two things since Monday – progress on stimulus talks and an update on the recovery. Inflation data, while interesting, has very little impact on the markets in a zero-interest-rate world with no changes by central banks in the foreseeable future. Talks in Congress stalled with no signs of progress after a pivotal call between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin. According to Pelosi, Democrats and the White House are “miles apart,” suggesting that a deal is still far away. The pressure on the market reflects the market’s disappointment with lawmakers and their fear that the longer this continues, the greater the impact on the economy and consumer spending. It is through these lens that they will look at retail sales tomorrow.

Retail sales are expected to grow at a slower pace in the month of July as economists forecast spending to rise by 2%, down from 7.5% in June. Excluding autos and gas, demand should be even softer. However, with average hourly earnings growth turning positive, Redbook reporting an uptick in spending and gas prices stabilizing last month, there’s scope for the data to beat. The forecast is relatively low, making it feasible for spending to be in the 2.5%-to-4% range, which would be weaker than June, but stronger than expected. At the onset, good data should be positive for the greenback, but unless it’s a blowout number (think 6% or better), the rally could be short-lived because expired unemployment benefits combined with the lack of progress in Washington means spending could slow further.

On Wednesday, the Department of Labor gave instructions on how to implement the executive order that extends federal unemployment benefits signed by President Donald Trump over the weekend. Eligible Americans will receive $300 per week as the additional $100 paid by states is optional. Even at 50% of previous benefits, some families are going to feel the sting, which will affect their spending. Keep an eye on USD/JPY as 107 has been key resistance. If it breaks this level on the back of good numbers, a swift peak is possible unless the data is unambiguously positive.

Tonight is also a big night for China, as the country prepares to release its latest industrial production and retail sales figures. Further improvements are expected for the world’s second largest economy. Good numbers should help the Australian dollar, which sold off despite strong labor market numbers. More than 110,000 jobs were created last month with a healthy mix of full- and part-time work. This was significantly better than the 30,000 forecast and helped to lift the participation rate to 64.7% from 64%. The unemployment rate increased but by less than anticipated. With that said, the currency’s reaction was muted because investors are looking past this improvement to the job losses that are likely with Victoria, the second most populated state in level 4 lockdown. Worries about August numbers is exactly why AUD shrugged off the report, which traders should take note of for tomorrow’s U.S. retail sales report.

Meanwhile, the New Zealand dollar fell sharply on the back of dovish comments from the Reserve Bank. Earlier this week the RBNZ increased asset purchases and suggested that more stimulus, including the possibility of negative rates, could be necessary. Last night, Geoff Bascand, deputy governor of RBNZ, said monetary policy could be easier, while RBNZ’s chief economist Yuong Ha said a weaker NZD could be preferable. The country also reported 14 new virus cases, bringing the total to 17. In response, Auckland remains on lockdown and, according to Prime Minister Jacinda Arden, they will be “going hard and early,” to quash COVID-19, which may include quick and decisive lockdown adjustments. The euro, sterling and the Canadian dollar traded higher on the back of U.S. dollar gains.

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