• Joel

USD Risk Ahead: US Retail Sales data incoming

USD Risk Ahead: US Retail Sales data incoming

It’s been a week of consolidation thus far for USD.

DXY has managed to recovered from lows around 92.50 that is made during the previous weeks, and thus far looks content to range between the upper and lower 93.00s.

The USD bearish arguments that pulled DXY to present levels from above 97.00 back in June are still there; i.e. the very dovish Fed and high supply of USDs, the worse nature of the Covid-19 outbreak and economic underperformance in the US compared to other developed markets.

However, as we discussed with the members earlier in the week, the strength of these arguments appears to have been somewhat lessened…

One reason for this is a pickup in US/China tensions (which are typically USD positive), after the US put sanctions on Hong Kong Leader Carrie Lam.

Another reason is that the US economy appears to have performed better than expected in July.

“Even as virus case-counts rebounded in July,” states Wells Fargo, “the re-opening of the economy continued largely undaunted.” The bank notes how ISM PMIs were strong in July, with the services sector especially strong (ISM Services PMI came in at 58.1), despite expectations for the sector to have suffered as a result of the outbreak.

Moreover, we also had strong July jobs data last Friday, with employers adding 1.763mln people to their payrolls. For the roughly 12.7mln Americans who have not yet managed to get their jobs back, the start of August signalled disaster with the expiry of the unemployment insurance scheme that had been paying them $600 per week, amid deadlock in Congress in negotiations on the next fiscal stimulus bill.

However, it appears that this hole has already been temporarily plugged; US President Trump over the weekend issues executive orders to restart payments to the unemployed of $400 per week.

Given that the fundamental picture in the US is looking a little more upbeat, USD bears have understandably lost momentum.

But this narrative of better than expected US economic performance in July could be made or broken on Friday, with the release of July US retail sales data.

“Retail sales have rebounded strongly over the past two months, with total sales just 0.6% off its February pre-virus level and control group sales are 5.0% above February levels” comment Wells Fargo.

Easing of lockdowns and pent up demand are behind the stunning recovery in consumer spending. However, Wells Fargo “remain cautious on the near-term consumer spending outlook, reflecting a resurgent virus, the absence of an extended fiscal stimulus deal and persistent uncertainty about the outlook in general.”

Expectations are for Core Retail Sales to rise 1.3% M/M in July. A good number (like 2% M/M or above) could enable DXY to finish the week on the front foot, as it did last week. A bad number (like below 0.0% M/M) could see DXY fall back to test last week’s 92.50ish lows. 


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