Sentiment and speculation seemed to be a stronger force in the currency market Wednesday morning than actual data. When the US calendar started to release its retail sales data and Fed Chairman Bernankes comments, the already initiated dollar slide accelerated.
Marking the dollar move in dramatic effect, EURUSD broke its month long range seen at 1.3050 in a 125-point rally to 1.3050. Also playing with an easily recognizable range, USDCHF kept its floor in after the 110-point drop bounced off of 1.2370. The British pound took advantage of a weakened dollar to rally a massive 190 points to within arms reach of 1.9650. Finally, USDJPY wasnt nearly as consistent in its 75-point slide as yen traders held off ahead of the impending Japanese GDP report.
Unlike yesterdays trade report, Wednesdays data found quite a bit of fanfare among the FX ranks. Offering satisfaction to short-term traders, the days indicators were somewhat mixed. MBA reported a 1.2 percent pick up in mortgage approvals last week, though those related to purchases actually dropped for the second consecutive week. Also over looked in the hoopla was the Business inventory and sales numbers. Inventories passed the month unchanged, the first such incidence of such since July of 2005, though sales jumped 1.4 percent. This is an encouraging relationship that supports some economists theory that the manufacturing sector has throttled back on production in order to burn off the inventory glut that was built through the first half of 2006. Amid all the hard economic data, the most closely watched gauge was the Commerce Departments read on January retail sales. Already expected to slow, purchasing activity actually stalled for the month on drops in auto and gas receipts. The value of gasoline sales dropped 0.7 percent along with prices while the auto sector reported a 1.3 percent slip. On the other hand, spending on furniture and consumer goods rose, suggesting the average American would continue to support growth into the new year.
While there were plenty of easily-read indicators available for dollar trading, the market was more taken by the less concise risk associated with Federal Reserve Chairman Ben Bernankes semi-annual testimony to the Senate Banking Committee. Offering the best chance for momentum in the currency market, the opening statement from the central banker triggered the biggest move across the majors. After allowing some time to digest the lengthy text, the market honed in on the specific phrase that there are initial signs that inflation pressures are beginning to diminish. This dovish tilt specifically attacks one of the last bastions dollar bulls have for expecting a return to rate hikes by the end of the year. Aside from this outlook on inflation though, the rest of the data was not too far out of the Feds customary stance. Bernanke repeated his projection of a possible positive turn in housing and the consumers ability to foot the bill for economic growth. Even his cautionary inflation flag was still flying while his core PCE projection for the year held at 2 to 2.25 percent. Since much of the language in the testimony reflected what Fed members have preached for months now, the dollar began to hit support in anticipation of the second wave of data due tomorrow.
Equities markets were encouraged by the Fed Chairmans expectations for cooling inflation. The tech-heavy NASDAQ Composite trumpeted a 1.0 percent rally to 2,484.54 by 16:05 GMT. The S&P 500 followed with a 0.63 percent advance to 1,453.31 while the Dow rounded out the three with a 0.51 percent climb of its own to 12,718.94. While macro-economic events were obviously playing a big hand in pushing the stock market higher, there were a few stand out firms that led the way with their own news. Chip-manufacturer Applied Materials Inc. surprised the market with better than expected quarterly earnings that sent shares 4.0 percent or $0.73 higher to $18.92. Attracting sellers, Coca-Cola reported a hefty 22 percent drop in fourth quarter net income that sent share value 0.7 percent lower on a $0.32 slide to $47.89.
Like every investors in the other US capital markets, Treasury traders reacted to Bernankes testimony by revising their rate expectations. The ten-year note rose 15/32nds to 98-31 as its yield dropped 6 basis points to 4.758 by 16:05 GMT. Bonds followed suit with a 27/32nds move lower to 94-12 as yields lost 6 basis points to 4.863.