Dollar Depressed Though Wholesale Data Strong

As the last few scraps of US data for the week ran across the wires, the currency market was already occupied with events in other countries that better sated short attention spans. However, today’s wholesale sales and inventory data holds greater implications for the world’s largest economy than many may expect.

Looking to the charts, the action in the dollar index illustrated the interconnectivity of the international currency market. Launching off of overnight support at 84.65, the trade-weighted asset rallied 35 points only to fully retrace the whole move in the New York session. In EURUSD, the pair jumped 65 points to come within stones through of the range top. Offering the opposite, GBPUSD plunged over 150 points to 1.9540 after its own central bank decision. Traders continued to flood back into the carry Thursday, sending USDJPY on a 65 point run to 121.45 and USDCHF over 100 points higher to 1.2515.
Though the market was not keen about buying dollars, this morning’s data offers a strong argument for position traders to hold onto their dollar longs. Offering the day some fundamental relevancy, the Commerce Department reported a pick up in wholesale sales and subsequent drop in inventories. According to the official statistics, December sales doubled the previous period’s pick up with a 1.8 percent rise. The strong activity was seen across the broad product groups with notable in petroleum, auto and computer sales. Alone, the sales statistics offer a promising outlook for the December retail sales report which comes out next week. However, the data may be more valuable than just a short outlook for the retail sector. When taken together with inventory figures, today’s numbers may foreshadow a turn in the hurting manufacturing sector. Wholesale stores dropped 0.5 percent for the period, the first contraction since January of 2004 and the biggest slide since May 2003. This is a promising dynamic since factories have had to work off a glut in inventories that was built up in the first three quarters of 2006. With stocks being burned off at a hot pace, new orders will now require a boost in production to keep up with demand.
Elsewhere, a few other events were influencing the dollar. The only other US data for the day, jobless claims offered little to change sentiment in the labor market. First time filings for unemployment benefits rose slightly to 311,000 people, still below the 314,000 average from 2006 and near lows on the four-week moving average. More importantly, two major central banks were moving the entire currency market with rhetoric and market speculation. After having their interests piqued by the MPC in the recent past, the BoE’s pass on a rate shift left the yield attached to the pound on par with that of the greenback. Alternatively, the ECB passed on a hike of their own, but brought the bulls to the euro’s doorstep after with decidedly hawkish commentary. With the simple addition of ‘strong vigilance’ a 3.75 percent European interest rate has been fully priced in. This is important for the dollar in a few ways. For one, with the Fed on pause for the immediate future, cross currency rate hikes erode the advantage the greenback holds in the carry. More unique to the EURUSD pair, the narrowing of its spread could revive international efforts to diversify away from the dollar.

Record highs can’t be made every day. Equities markets were trading lower Thursday, led by downgrades and poor earnings figures. By 16:45 GMT, the Dow was the biggest loser with a 0.58 percent drop to 12,593.41. The broad S&P 500 moved 0.44 lower to 1,443.71 while the NASDAQ Composite lost 0.32 percent to 2,482.61. Breaking the overall indices down, the financial sector was driven lower by a disappointing outlook from HSBC. The retail banking firm announced that bad debt provisions could have jumped 20 percent more than analysts expect in 2006. Shares responded with a $2.46 sell off to $89.76. Bringing the housing market back into focus, Toll Brothers reported a 19 percent drop in first quarter revenues which sent shares 3.5 percent lower to $33.22.
Treasuries were little changed by mid-day as a strong wholesales number competed with bullish forecasts for foreign government debt. The ten-year note was unchanged at 99-02 with a yield of 4.745 by 16:45 GMT. Thirty-year bonds were also even at 94-17 as yields held steady at 4.852.