Rise in UK Retail Sales Reduces Need for BoE to Ease

USD: Risk Aversion or U.S. Data?
EUR: Drops for the First Time in 6 Trading Days
AUD: Sell-Off in Stocks Overshadow Stronger Data
NZD: Steep Decline in Job Ads
CAD: Softer Inflationary Pressures Ahead?
JPY: Calls for Monetary Stimulus

In UK retail sales beat expectations rising by 0.6% versus 0.4% eyed as pent up demand and higher prices helped retailers in September. Cable surged to session highs taking out the 1.6150 level on investor optimism over the prospects of the UK economy. UK retail sales rebounded in September boosted by sales in clothing and school uniforms due to the start on a unusually late autumn school term. Clothing sales rose by 2.0% contributing a lion’s share of growth to the number. Overall retail sales rose by 1.0% after slumping the month prior as Britons stayed home to watch the Olympics. This was the second major economic beat this week for UK after Wednesday’s better than expected labour data indicating that the economy is continuing to rebound. The news has been helping to keep the pound bid with the pair holding steady above the 1.6100 for most of this week. If risk flows remain positive into North American trade the pair will likely challenge the 1.6200 figure as it slowly makes its way towards the swing highs on 1.6300 on improving economic conditions and better investor sentiment.

The euro weakened against the U.S. dollar for the first time in 6 trading days. There hasn’t been any bad news out of Europe to explain the reversal, which leaves the sell-off in U.S. stocks as the main catalyst. Yes, the EU Summit will most likely be a disappointment which shouldn’t surprise anyone. European officials made it clear that no major decisions will be made and the only accomplishment will be a time-line for a banking union. Spain could be warming to the idea of a bailout because according to the Wall Street Journal, who quoted a Spanish official, the ECB must define aid conditions for Spain. This in no way means that Spain has committed to a bailout, but the fact that they are telling the ECB to show them what they have in mind suggests that they are not opposed to the idea either.

Meanwhile in Europe the Spanish bond auction went off well as it sold more than 4.6 billion euros of 3, 4 and 10 year bonds. This was above the 4.5 Billion target with yields improving on all fronts. The easing of Spanish yields should provide a double boost to Iberian economy as it decreases funding costs while at same time allowing the government to make smaller cuts in fiscal spending. Spain has now covered 95% of this year’s planned issuance. This shows that investors have not lost their taste for Spanish bonds despite the risk of a bailout. The EU Leaders Summit ends at 4am ET / 8 GMT on Friday. German producer prices and Euro-zone current account figures are scheduled for release and no major surprises are expected. Better than expected Swiss trade numbers triggered an extremely short-lived rally in the Swiss Franc. Exports surged 2.6% last month while imports rose 3.0%. The increase in domestic and external demand boosted the trade surplus to 2.01B from 1.61B in September. These numbers show that the Swiss National Bank’s efforts to contain the rally in the Franc are paying off.

The big question in the forex market yesterday was whether the rally in the U.S. dollar was driven by risk aversion or stronger data. The fact that the dollar strengthened against all major currencies including the Japanese Yen and Swiss Franc suggests that this is a story about the greenback but if investors were truly encouraged by the latest economic reports, U.S. stocks would not have fallen as much as they did yesterday. The big move was in the Nasdaq, which dropped more than 1% on disappointing earnings from Google. High beta (risky) currencies such as the euro and British pound were trading sharply higher during the early European trading session but gave up all of their gains and then some during the U.S. hours.

For the first time in 6 months, manufacturing activity in the Philadelphia region expanded. The Philly Fed index rose to 5.4 from -1.9 in the month of September, which is encouraging and consistent with the improvement seen in the NY region. Yet we can’t necessarily attribute the rally in the dollar to an improvement in data because the details of the Philly Fed survey were not as convincing as the headline number. The main reason why the Philly Index increased was because of higher prices. New orders and employment conditions worsened, dragging the future index down to 21.6 from 41.2. Jobless claims also rose more than expected but the dollar was unfazed by the initial release. Jobless claims increased to 388k this week from 342k. While a snap-back was expected after the quarterly reporting distortions last week, few people expected claims to rise to its highest level in 3 months. The increase in claims suggests that the labour market may not be performing nearly as well as the drop in the unemployment rate suggests – a worry that has been at the front of the minds of the Federal Reserve, economists and many investors. The only unambiguously positive report was leading indicators, which rose 0.6% last month. Higher stock prices and stronger labour market conditions contributed to the largest increase since February. Existing home sales are scheduled for release today and given the recent improvements in housing market data, there’s scope for an upside surprise. However stronger housing numbers may not be enough to revive the risk rally especially if there are more disappointments in earnings.

Chinese GDP printed in line at 7.4% as expected both Retail Sales and Industrial Production beat forecasts suggesting that economic activity continues to expand at a healthy pace. Retail Sales rose 14.2% versus 13.2% eyed and Industrial Production increased to 9.2% from 9.0% anticipated. The news put to rest for the time being any fears that China’s economy will continue to contract further as both consumer and manufacturing gauges of activity reversed their slides. The Aussie responded well to the news rising above the 1.0400 level in European trade and the pair may challenge the 1.0450 resistance later today if US flows prove supportive.

Having hit a 7 week high of 79.46, the U.S. dollar ended the North American trading session only slightly higher against the Japanese Yen. U.S. equities failed to extend its gains, putting pressure on all of the Yen crosses. No Japanese economic data was released overnight and the rally in risk during the Asian trading session faded during the U.S. hours. Aside from Prime Minister Noda’s plans to increase fiscal stimulus, there are now calls for the Bank of Japan to increase monetary stimulus.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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