Euro Hurt by Retail Plunge, Puts 1.3700 in Doubt

[B]- Japanese Yen: on holiday

  • Euro: German Retail Sales plunge, M3 in double digits
  • British Pound: Mortgages as expected
  • Dollar: Personal Income and Spending along with Chicago PMI on tap[/B]

Euro Hurt by Retail Plunge, Puts 1.3700 in Doubt
The euro was on the ropes from the start of the Asian session today, seeing no follow through from Friday’s very weak US GDP report. News of a distressed hedge fund seller pushed the pair lower in early Asian trade, but the real blow to euro longs came at the start of trade in Europe when German Retail Sales shocked the market with a -0.7% decline versus 0.9% forecasted rise. Clearly, German consumers continue to be cautious in the face of a near 30% increase of VAT taxes instituted at the start of this year.
Tonight’s news contrasts sharply with the recent positive consumer sentiment data as well as last week’s Bloomberg Retail PMI both of which recorded healthy increases over the month prior. Indeed, many analysts believe that the contraction in German consumption is temporary, and the consumer demand will return with full force as the region’s labor markets begin to improve and wages increase. To that end this week’s German and EZ unemployment data may prove to be quite instructive to the market. Traders anticipate a further decline in the German rate from 9.2% to 9.1% and if it is not forthcoming, the news may trigger a deeper retrace in the pair as market considers the impact of the escalating exchange rates. The decline in the latest Retails Sales reading means that sales in Q1 have dropped -2.9% on a quarter over quarter basis - a horrid performance from the 0.7% rise in Q4 of last year. The weak results should keep any ECB rate hike expectations capped at the 4.0% level at least until traders sees some concrete evidence of a pick up in consumption in the Euro-zone.
Meanwhile, with Japan on holiday, the yen saw very little action despite the bullish news that PBOC has raised bank reserve requirements yet again. The yen continues to suffer from the very cold inflation figures last week that showed the return of negative price momentum in the core readings. Still, the yen’s fate is far more closely aligned with the global equity markets than the fundamentals in Japan, and tonight’s liquidity tightening news may give speculations on the Shanghai stock exchange which has become parabolic as of late, some thought for pause. In turn if Shanghai corrects, so may the DJIA and that could bring some long anticipated yen strength as the carry trade is unwound.
Finally, in the wake of the weak GDP numbers, today’s Personal Income and Personal Spending figures loom even larger than usual. The last argument of the dollar bulls is that strong labor markets and growing wages will offset the asset deflation caused by the collapse of housing. Today’s reports could make or break that thesis.