With no U.S. economic data on the calendar, it has been a quiet morning in the foreign exchange market. The Forex Rally Has Lost Momentum which is not surprising considering the degree of dollar weakness last week. Short dollar positions in the futures market also reverted back towards extreme levels which increased the chances of a reversal this week. However as we mentioned in our report on Friday, do not mistake a relief rally with a bottom. The appreciation in the dollar this morning has not threatened the currency's overall downtrend and the old woes plaguing the dollar could return this week with talks of a trade war and market moving data on the calendar.
We want to take this opportunity to talk about one the most important pieces of economic data that is due for release this week - Tuesday's U.S. retail sales report.
Consumer spending is the backbone of every economy and so far the recovery in the U.S. has been fueled by government or corporate spending. Over the past few months, U.S. consumers have been cutting back and trading down. The only type of retail company that is doing well right now are 99 cent stores. Although retail sales rose 2 out of the past 5 months, most of the gains were due to higher gasoline prices or demand for autos and for the month of August, they will continue to be major contributors to consumer spending.
Very High Expectations for Retail Sales
However the market has very high expectations for retail sales. According to Bloomberg, the current forecast calls for a 1.9 percent rise in consumer spending, which would be the strongest pace of gains since January 2006. There is no way that the U.S. economy has returned to the pace of growth that we saw in 2006, but the whole idea is that the contraction in spending has been so strong that any pickup would be significant on a percentage basis. The reason why retail sales is expected to rise is because of Obama Administration's Cash for Clunkers program has fueled strong demand for new vehicles. Gas prices also increased materially last month which should boost receipts at gas stations.
However even if consumer spending is strong, it will be distorting as spending on goods outside of autos and gas are only expected to rise by 0.1 percent. Spending on core goods have been very weak. Back to school season which is historically one of the most lucrative times of the year for retailers was particularly disappointing. Consumers are still looking for bargains, which has affected high end retailers. Another big red flag for consumer spending is the record $21.6B drop in borrowing last month. The 10 percent drop in consumer credit indicates that spending has weakened. Therefore with the cash for clunkers program ending and the contribution from back to school sales fading, any rise in spending should be temporary. Don't forget in addition to retail sales report, producer prices and the Empire State manufacturing survey will also be released tomorrow morning. Kathy Lien .FX360.Com
May The Force Be With You.
Eddie Azron.