The decline in activity at U.S. retailers wasn’t as bad as analysts had braced themselves for while ever-strong activity in China has provided some relief on Tuesday with investors keen to leave behind risk aversion while embracing risk appetite. Earlier weakness in the dollar has been derailed by a jump in the greenback against its typical risk adversaries of the Swiss franc and Japanese yen. The Swiss revised down growth blaming the strong franc, while the Japanese announced a new loan program aimed at reviving the moribund economy.
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U.S. Dollar – Retail sales slipped by just 0.2% in May while April’s gain was revised lower. Overall investors seem willing to read the headline number as a sign of relief that the consumer still has a pulse. Stripping out sales of autos and gasoline, consumer spending rose by 0.3%. Producer prices rose by a little more than hoped for although excluding the volatile components of food and energy prices were no worse than expected. The dollar got off to a rough start with risk aversion moving to backstage following strong reports for industrial production and retail sales. During the European session the dollar basket slipped to 74.28 as investors bought riskier assets around the world, sacrificing the dollar as a funding unit, before it rebounded following the release of Tuesday’s data. At 74.50 the dollar index is about unchanged.
Euro – The euro rose in a session void of economic data while investors remain in suspense as they await the outcome of today’s meeting among leaders who attempt to find a solution to the Greek debt issue. Lawmakers from Germany are pushing for a legitimization of default as they attempt to coerce private bondholders to accept an extension of maturities. The European Central Bank recognizes that by doing so would open up a can of worms at the ratings agencies creating further problems down the road, not to mention the potential for a fresh banking crisis. The euro rose against the dollar to a daily peak at $1.4472 as risk appetite grew while after the release of U.S. data it pared its advance to $1.4428.
Japanese yen – The Bank of Japan accompanied its unchanged policy stance with the announcement of a two-year program of loans at the discount rate of 0.1% in an effort to revitalize manufacturing after the earthquake and tsunami in March. Governor Shirakawa sounded remarkably upbeat claiming that he was optimistic about the longer-term prospects of recovery, while admitting that the key now is the pace of recovery one supply constraints have been dealt with. The ¥500 billion loan program is a shot in the arm for the nation and has helped temper the recent gains for the Japanese yen, which fell to ¥80.56 after U.S. data.
Aussie dollar –The Aussie reached its highest in three days against the U.S. dollar on signs that exports within the Asian region were buoyant following an annual 13.3% pace of increase in Chinese industrial production. Retail sales also expanded at a brisk pace growing year-on-year by 16.9%. Consumer prices in May, however, matched an April reading of 5.5% and remain at the highest in three years. Investor sentiment failed to take a bruising after the Peoples Bank announced a move to left the reserve requirement ratio to its highest yet in a move aimed to stem lending. The market is also abuzz with talk that the Bank will tighten interest rates in coming weeks. The yuan was also allowed to appreciate Tuesday. A Manpower employment survey across the region showed employers expectations were tempered in China, Australia and Japan. The Aussie rose to $1.0667 U.S. cents.
Canadian dollar – The stronger appetite for risk on Tuesday boosted the Canadian dollar and even after the promise of additional weekend supply from OPEC, the price of crude is also higher on the day. The Canadian unit has surged to $1.0323 U.S. cents.
British pound – Consumer prices rose by 4.5% in May matching the pace of increase in the previous month. Prices remain at the highest recorded reading since October of 2008. However, after several months of battling with the Bank of England, investors are more inclined these days to agree that rates don’t yet need to rise. The pound was boosted by the return of risk appetite and matched gains made by the euro versus the dollar.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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