Good Retail Sales Not Good Enough for Dollar Bulls (page 1 of 2)

US Dollar

The markets have been very quiet today as everyone shifts to vacation mode. Most exchanges around the world are closed for Good Friday with some in Europe closed for Easter Monday as well.

Unfortunately, the much awaited retails sale report was not surprising enough to cause any meaningful preholiday volatility. After falling an upwardly revised 0.8 percent in February, sales rebounded by 0.6 percent in March. Excluding automobiles, sales increased 0.4 percent. It appears that the improving labor market is still fueling healthy spending habits by keeping consumers optimistic.

As long as this trend persists, the Federal Reserve has their argument for continuing to raise interest rates. No matter how concerned we get about the housing market or the fact that oil prices are now less than 30 cents away from their all time highs, until we see a response by consumers to curb their spending substantially, the impact on growth will remain limited.

The University of Michigan released today survey indicates that confidence is holding steady. However it would be surprising that if the current downtrend in the housing market and the uptrend in oil prices continue, that US consumers can actually continue to spend as voraciously as they have in the past. Lost in the mix were reports that import prices fell more than expected last month while business inventories remained flat following a 0.6 percent drop in sales.

Even though markets are closed tomorrow, industrial production is scheduled for release. Manufacturing activity has been floundering, which has prompted analysts to forecast a slower acceleration in activity last month. We doubt that this will have much of an impact on the market in general. The big mover of the day was actually the commodity currencies and in particular, the Aussie and Kiwi.

Traditionally, these two currencies have had a strong correlation, but over the past few months, the correlation has broken down significantly. The Kiwi is bouncing thanks to last night's strong retail sales report while the Aussie is the day's biggest loser as gold prices fail to sustain its previous momentum.

Euro

After the stronger US retail sales numbers, the Euro lost ground against the dollar and broke below the 1.20 level once again. However, the same level has proven to be a strong region of support as the EUR/USD quietly recuperated all of its losses in the second half of the US session.

Economic data released this morning was actually Euro bearish with inflation growth slowing in France and the Italian trade balance widening more than expected. This comes after slower inflation growth in Germany and what is expected to be slower growth in Italy as well. Yet, with energy prices on the rise once again, it would not be surprising to see inflation creep higher in the months to come.

Politically, there have been no new developments out of Italy and we are expecting at least a few more weeks of uncertainty. European markets are closed both Friday and Monday, so we do not expect any major news to push the EUR/USD out of its tight trading range.

British Pound

For the fourth day in a row, the British pound is stronger against the US dollar. After seeing stabilization in the housing sector and continued mergers and acquisition activity, there is more good news out of the UK today. Department store chain John Lewis reported stronger sales this past week, while the BCC reported stronger export orders in the first quarter.