The 1.2% decline in U.S. September retail sales (expected -0.7%) reflects a broadening decline in demand beyond clothes and food and onto autos and other durables, thus driving back attention towards weakening economic fundamentals. This is prompting renewed declines in U.S. equity indices and a pull back in yen crosses. The chart below shows the year on year change in retail sales of 1.03% was the first decline since October 2002. There has been only three annual declines since 1992 (September 2001 and October 2002 are the others). The sales report carries negative implications for September retail jobs, especially as retail payrolls have now been in the red for longer than in the 2001-2 last recession.
We’re seeing a repeat of autumn 2007 and summer 2008 when surging market volatility of summer 2007 and spring 2008 gave way to deepening economic deterioration as shaky equity market confidence impacted consumer demand, corporate earnings and planned capex. Separately, the U.S. Empire state manufacturing index fell to -24.6 in October from -7.4, the worst level on record. New orders tumbled to -21 from 4.4. USD/JPY tests below 101 yen, eyeing 100 later in the session, while GBP/JPY, having already fallen below our projected support of 176 to test as low as 175. Bernanke's speech at noon on the economic outlook will further indicate macroeconomic weakness and open the door for rates to drop as low as 1.00% before yearend. U.S.
USD/JPY to Revisit 100.45 Weak macroeconomic data diverts attention from governments’ banking sector to the real economy, thus dragging USD/JPY towards 101 and onto 100.50s. The failure to breach 103 yen has been cemented, shifting focus towards the 98 figure. The USD/JPY pair is also increasingly reflecting eroding confidence among Japanese investors, whose losses in their own equity indexes are dealing a major blow to investment appetite abroad, hence, yen crosses. Technically, the two-hour chart shows a trend line resistance at 101.55, calling for 101.05, a 38% retracement of bounce from the Oct. 9 low. Subsequent target stands at 50% retracement i.e.100.44.
Time for More Declines in Sterling
The increasingly negative correlation between sterling and risk appetite allows for renewed losses towards $1.7450 and $1.7380 especially on the combination of eroding consumer demand and anticipated pessimist tone from Bernanke’s speech. We should start hearing the word “recession” being uttered more often by Federal Reserve officials, as we have already heard from Yellen and Lockhardt earlier. Trend line resistance stands at $1.7450, backed by $1.7380. Upside capped at 1.7380.
Euro Eyes $1.35 Despite negative economic figures from the U.S., EUR/USD will go unscathed as the impact of further deleveraging in capital markets is to drag higher yielding currencies against the dollar. With currency markets continuing to move to the tune of risk appetite, $1.3550 stands as the next interim support, followed by 1.3500.
Ashraf Laidi Chief FX Strategist CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 Direct: 646.871.6809 Cell: 646.639.6825 Genl: 212.644.4220 Fax: 212.644.4222 Email: a.laidi@cmcmarkets.com
