[B]- Japan: Yen see some carry liquidation
- Euro: consolidates below 1.3500
- Pound: Sill weak despite the hike
- US Dollar: Retail Trade and PPI will tell the story[/B]
Dollar ; Retail Trade will Set Its Fate
After a day of dollar strength the currency market spend the night in quiet consolidation as traders awaited US Retail Sales data due 12:30 GMT. Market players expect the number to rise 0.4% on a month over month basis, but preliminary reports indicate that sales could be significantly weaker than anticipated as a slew of retailers from Wal-Mart to Banana Republic all reported big declines in their monthly same store sales.
Although some analysts blame April?s poor performance on early Easter holidays, change in the daylight savings time and unusually cold weather across much of the country, if the Retail Sales number does indeed miss the estimates it could be a far more troubling symptom of slowdown in overall US consumer demand. As many dollar bears have long argued, the decline in housing values may be finally impacting discretionary spending with consumers unable to access additional cash flow from mortgage equity withdrawals. The price of gasoline, which on a national average has broken above the psychologically important $3.00 level, is also tempering growth with drivers now forced to spend additional income on transportation. Ironically enough, the increase in gasoline prices could actually improve the headline number, but the market will almost certainly focus on the retail-ex gasoline figures to get a more accurate reading of underlying demand.
On the other hand, should the Retail Sales print in line, dollar bulls may get a major boost. As we?ve argued over the past week, with the EURUSD grossly overbought, the market would need to see recessionary-like data out of the US in order to drive the dollar lower. If Retail Sales maintains pace, the rebound in the greenback could easily continue, as the doomsday scenarios of the bears would not materialize.
In the meantime, yen finally saw strength with USDJPY temporarily trading down to 119.50 in early London trade as some risk aversion crept back into the market. Yesterday?s drop in the Dow and today declines in all the Asia-Pac bourses curbed the appetite for further carry trades. With the Shanghai index now trading above 4000 with a P/E ratio in excess of 40 the possibility of much more severe correction remains quite high. Anecdotal stories our China of people borrowing on their houses to speculate in stocks, as well as news reports that Chinese investors opened more accounts in April than in all of the month?s prior combined, suggests a market clearly out of control. A second decline in the Shanghai stock market is likely to be much sharper and more damaging than the initial sell off in early March and will take down global equity indexes and USDJPY along with it.