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Wednesday April 13, 2005 - 21:27:33 GMT

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Forex: Dollar U-Turns Despite Weak Retail Sales Report

DailyFX Fundamentals 04-13-05

By Kathy Lien, Chief Strategist of

· Dollar U-Turns Despite Weak Retail Sales Report
· Pound Ends Stronger In Face Of Higher Unemployment
· Japanese Yen Extends Rally As Oil Prices Recede


There was quite a bit of volatility in the FX markets today as prices U-turned once again following the release of US retail sales data. Retail sales came in much weaker than expected, causing the Euro to skyrocket above 1.30, but on what may be the perfect scenario of buy the rumor sell the news, the dollar reversed course, trading right back below 1.29. With nothing to explain the move, the rumor mill was in full swing with the market talking about possible short covering by a large US investor – Warren Buffett’s name has come up quite a few times as well as possible concern by Asian central banks about diversifying into the euro at this time given the increasing likelihood of a referendum rejection of the EU Constitution by the French. Nothing was verified, which suggests that right now, it is all about Friday’s TIC data. Across the Atlantic, unsurprisingly French inflation came in higher than expected, as a direct result of energy prices. Italian industrial production was a bit weaker which underscores the difficulty that Eurozone countries are facing. Although ECB Issing said that there are no second round effects from oil prices, higher energy prices has undoubtedly taken a toll on growth during the month of February.


Taking a closer look at the retail sales report, we see that retail sales came in far short of expectations, increasing by only 0.3%, compared to the forecast for 0.8% growth. Retail sales less autos were also very disappointing, rising only 0.1% compared to expectations for 0.5% growth. The data indicates that the rise in gasoline prices has taken an even bigger toll on consumer spending, above which could have been compensated by higher gasoline receipts. In fact retail sales excluding autos and gasoline purchases were actually down 0.1%, which makes it even more puzzling that the dollar rallied following a knee-jerk sell-off. The only reason aside from the flow based movements detailed in the EURUSD section is that the weak retail sales report only has one ramification, that is the Fed will only be raising rates by a quarter of a point on May 3rd. Yet the market already priced in this smaller move following the weak non-farm payrolls report and yesterday’s minutes from the March 22 FOMC meeting. Dallas Federal Reserve President Fischer dealt half point supporters another blow by saying that he is “very comfortable with the Fed’s current pace of interest rate tightening.” Fischer is a voting President, replacing Bob McTeer who left for an academic post.


The pound strengthened against the US dollar today, principally on US retail sales data. UK economic data would actually have suggested otherwise, as March jobless claims rose by 11,000, the most in 22 months. Certain analysts suggested that the change may in part reflect more inactive citizens signing on for jobless benefits, rather than a substantially worst labor market. Regardless of the actual rationale, the news pushed the unemployment rate up to 2.7% and dealt a blow to Prime Minister Tony Blair’s attempt to put the Labour Party’s economic record at the center of his reelection bid. The impact should not last very long though since the improved relationship between Brown and Blair have certainly bolstered support for the Labour Party. The pound was also affected by bullish data such as the 4.7% rise in February average earnings. This gain was entirely attributable to larger bonuses and suggested that inflationary pressures were building up, increasing the likelihood of future interest rate hikes.


The yen strengthened after last night’s inflation data was released. Japan’s consumer price index increased for the 13th month in March. This eroded the profits of companies that are already struggling to pass on costs amidst seven years of consumer price inflation. The domestic CGPI rose 0.3% on the month, a modicum above the expected 0.2%, as higher costs of oil products, metals and other commodities pushed the import price index up 1.8% following February’s 2.8% increase. Prices of gasoline and oil products rose 16.5% in March, contributing half of the overall increase. Steel and chemicals prices also rose substantially. Meanwhile, export prices have not risen nearly as much with a 0.7% monthly change. Oil-related concerns were a major reason the March Tankan survey showed that business sentiment was deteriorating, but today’s price action might have given manufacturers a reason to cheer as crude oil fell by as much as 4.2% after the International Energy Agency cut its forecast for world fuel demand. The news would of course be yen-bullish as Japan imports almost all of its oil.


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AA 08:30 GB- Employment
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AA 14:00 US-Powell Testimony
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AA 08:30 GB- CPI
A 12:30 US- Housing Starts/Permits
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AA 1:30 AU- Employment
AA 08:30 GB- Retail Sales
A 14:30 US- EIA Crude
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A 12:30 CA- CPI/Retail Sales

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