Dollar rebounds on strong retail outlook

IB FX Brief: Strong U.S. retail data gives bears cause to pause

After an earlier bout of dollar weakness the greenback is clawing its way back sharply on Tuesday. Just 24 hours ago the opposite situation caught our eye as initial dollar strength gave way to a round of selling. Early weakness in the dollar was blamed on continued strength in global stocks and rising commodity prices symptomatic of ongoing recovery. Investors are also still responding in part to Monday’s warning from Moody’s Investor Services that President Obama’s deal with Congressional Republicans had raised the prospect that the nation’s AAA-rating might be placed on negative credit watch.

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U.S. Dollar – What’s possibly clouding the perspective of the dollar is this afternoon’s final chapter of the year from the Fed as it concludes a short session in Washington to discuss interest rates and its bond purchase plan. Only a week ago Mr. Bernanke threatened the possibility of further bond purchases if required, but that was before the market was taken by surprise with an extension of Bush-era tax cuts. Yet still market chatter rests upon whether the FOMC might deliver a blow to the dollar this afternoon. The dollar index cut about half of its session losses just ahead of key data today on November retail sales to stand at 79.12. Retail sales in the event rose slightly more than expected at 0.8% on the previous month.

Aussie dollar – The Aussie traded at a one-month high as risk appetite continued unabated in the Asian markets. As the Aussie strengthened it traded above par with the dollar reaching a session high at $1.0017. In the immediate aftermath of stronger U.S. retail sales data the Aussie pared gains to trade at 99.93 U.S. cents. In Sydney overnight the local dollar was unfazed by a 13.2% year-on-year dip in dwelling starts.

Canadian dollar – The Canadian dollar is torn between a desire to follow commodity prices higher and the strength of the U.S. dollar on strong domestic data. Net-net the loonie is largely unchanged and trades at 99.07 U.S. cents. Strong retailing activity in Canada’s biggest export market is arguably positive for the greenback rather than Canada’s dollar.

Euro – The euro put in a three week high against the U.S. dollar and the yen as some investors put fears aside over Eurozone debt contagion. The euro rose to $1.3498 after a strong report on confidence across the Eurozone in the form of a ZEW report, which revealed a rise in December to 135.5 from 13.8. Analysts had predicted a minor decline in the sentiment indicator and so the surprise reading sent the euro surging. After the U.S. data, however, the euro pared gains to as low as $1.3415. The euro trades at ¥111.85 against the Japanese unit.

British pound – The pound shot up to a session peak at $1.5912 in the aftermath of Tuesday’s consumer price index, which showed accelerating prices during November. The year-over-year data showed prices higher by 3.3% gaining by one-tenth of a percentage point on the October data. The annual pace leaves price increase at the highest since May and boosted dealers’ appetite for the pound as prospects for ever-rising inflation in 2011 seem to be worse and weaken the case for steady interest rates. Sales tax increases come into effect next year and are destined to erode purchasing power. The pound’s rise was soured by what appears to be a large sell order that coincided with the reversal in the fortunes of the dollar ahead or retail sales. The pound sank through its recent lows to trade down on the day at $1.5801.

Japanese yen – Volatility in the dollar/yen pair has been unusual in the last several sessions with the one-and-a-half yen range evident within the space of just 24 hours. The dollar’s losses this morning saw it drop to ¥82.87 before surging to ¥83.38 after retail sales data. In Tokyo overnight data showed the biggest monthly decline in industrial production data since February 2009 as October data fell 2.0% on the month to reduce the year-over-year gain to 4.3%.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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