Retail sales figures for the U.S. grew as expected by 0.3% in August but fell 0.4% when excluding autos, disappointing expectations of a 0.2% rise. The ex autos sales marks the third decline over the last five months, reflecting a clear slowdown in consumption. On a year-to-year basis, headline retail sales rose to 3.7% from 3.5%, while ex autos slowed to 3.9% from 4.5%.
The weakness in ex autos provides reason for more Fed apprehension over the US consumer, especially following the deteriorating picture for U.S. workers over the past 3 months.
The U.S. Q2 current account deficit slowed to $190.8 billion from $192.6 billion due to rising services surplus and rising foreign purchases of U.S. stocks.
Classic symptoms of a run on a bank are now the result of the current credit crisis after UK Bank Northern Rock seeks emergency funding from the Bank of England, prompting prolonged declines in sterling to fresh 14-month lows against the euro and a one-week low against the U.S. dollar. Northern Rock, which holds over $220 billion in consumer loans will obtain the biggest bail out in the history of the UK in 30 years from a central bank that was reluctant in following its Eurozone and U.S. counterpart to inject liquidity in order to alleviate the liquidity freeze of the current credit crisis. The latest developments are likely to place an end to the Bank of England’s tightening cycle and raise vulnerability of further losses in sterling, which carries the highest interest rate among the G7 economies. The Northern Rock developments are triggering a reduction in risk appetite trades, prompting broad but modest appreciation in the yen, while dragging the euro’s gains versus the dollar.
U.S. industrial production is due at 9.15 am EST, expected to have risen 0.3% in August, matching the July pace, while capacity utilization is seen rising to 82% from 81.9%, which would be the highest rate since August 2006.
The 10 am release of preliminary September University of Michigan consumer sentiment is expected at 83.5 from 83.4, which would be a muted reaction to the recent market turmoil and rising concerns of joblessness.
Euro tempers gains, but stabilizes on US sales Euro retreats in the face of a combination of risk appetite and falling sterling, as well as the latest inflation figures, showing Eurozone CPI fell 0.4% in the month ending in August, while rising 1.9% on an annual basis, matching the July figure. The EURUSD pullback remains is in line with our projected support levels of 1.3870 and 1.3850, but the weakness in US retail sales, may extend the rebound to 1.39, calling up resistance at 1.3930.
Yen goes North on Northern Rock The yen flexed its safe haven muscles as risk appetite trades were curtailed following news of the Northern Rock bailout. USDJPY fell from 115.38 to 114.45. With the US data showing continued relative resilience, this is expected to offset nervousness from the UK , which can limit yen gains around the 114.50. But the likelihood of a pullback in US stocks ahead of next week’s data packed week and Wednesday’s FOMC decision may extend losses to 114. Traders must also keep an eye on the VIX index, which remains at 25, well above its 100 and 200 day moving averages of 18 and 15 respectively. Upside capped at 115.20.
Pounded sterling stabilizes after US sales We expect sterling’s reprieve from weak US retail sales to be short-lived, as the pair is seen retesting the $2.01 figure, with interim support standing at $2.0070. Yesterday’s losses following the RICS survey and the latest post Northern Rock damage is likely to accelerate losses in the high yielding currency, which has yet to unwind gains accumulated on expectations of further rate hikes. Especially risky for the currency is a renewed bout of risk aversion in the event of fresh declines in world equities. Upside capped at 2.0170. CAD extends gains fresh 30-years The fact that CAD remains bolstered against the USD despite creeping risk aversion underscores the weakness in the US and the impact of renewed hawkishness BoC Governor Dodge who insisted earlier this week on the need to battle inflation. A 40% possibility of seeing one more rate hike from the BoC within the next 4 months should cap any rebound in USCAD beyond the 1.06 figure. Interim support stands at 1.0280, followed by 1.0250. Upside capped at 1.0330.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York , NY 10005 Direct: 646.871.6809 Cell: 646.639.6825 Gen: 212.644.4220 Fax: 212.644.4222 Email: a.laidi@cmcmarkets.com
