The strength of US activity data appears relentless: yesterday’s September retail sales figures beat estimates (0.7% MoM), while the August figure was also revised up. Our economist points out some inconsistency with the evidence of a decline in credit card spending in September, as well as a weakening of consumer confidence. Ultimately, our fundamental view remains that reduced disposable income and reduced availability of credit will result in weaker consumer spending numbers. For now, however, consumer data has all but driven the narrative of America’s economic resilience.
Movements in the forex market have been somewhat contradictory after the publication. The dollar did not rise very aggressively after yesterday’s retail sales numbers, with the exception of USD/CAD, which was temporarily boosted higher by softer-than-expected Canadian inflation numbers. Still, we saw the 2-year USD swap rate jump 12 basis points to 5.08%, close to a previous high on March 8 (5.15%), before correcting marginally to 5.05%. overnight. 2-year Treasury yields hit the highest level since 2006, at 5.2%. While USD/JPY remained supported, AUD and EUR rose yesterday, in what appeared to be a pro-cyclical shift in sentiment. There is a chance that some developments in the Middle East with a hint of optimism (for example, Biden’s trip to Israel that could help ease tensions) could have taken some momentum away from the safe-haven dollar, but we probably would have had to see some more weakness in countries like the Swiss franc if that were the case.
The seemingly waning relationship between Treasury yields and the US dollar was rather due to some positioning readjustment. This readjustment favored the three procyclical G10 currencies that were not facing other negative factors yesterday: EUR, AUD and SEK. Among others, the CAD and NZD were hit by weak inflation numbers, the NOK by falling oil prices (before this morning’s rally) and the GBP by lower-than-expected wage growth.
We are seeing a broad-based weakening of the dollar this morning after Chinese data (Q3 GDP, September industrial production and retail sales) surprised to the upside. The China growth factor has been a quieter driver of market moves recently, but today’s numbers seem to favor the view that the worst is over when it comes to the Chinese data doom and gloom. We still prefer the AUD as a proxy trade, although the overnight employment numbers will prove to be a key event risk given that markets still have around 15 basis points of RBA tightening to potentially discount in the event of a weak situation .
We could see some China-related optimism spill over into stock performance today and keep some pressure on the dollar, even though the big jump in US short-term yields suggests the dollar’s scope for decline is likely to continue. being limited for now. Today’s US calendar may not move rates and the exchange rate as much as yesterday, and much attention will be focused on diplomatic developments in the Middle East. Aside from some housing numbers, the highlight in the US will be the Federal Reserve’s Beige Book. As always, we will be watching the Fed speakers closely, although the recent rally in yields makes any aggressive deviation in language less likely. Christopher Waller, John Williams, Michelle Bowman, Thomas Barkin, Patrick Harker and Lisa Cook are set to speak today.