Week Ahead in FX: G7 & US Retail Sales to Test USD Rally

The roller-coaster ride that is the EUR/USD was full of thrills and spills the first week of June. Optimism turned to pessimism as Greece and the rest of the European Union drifted apart after what seemed to be a real chance of an agreement. The embattled USD got the best of the EUR as it brought forth the best performing indicator for the United States, employment. Private payrolls, weekly claims, and to seal the deal, the nonfarm payrolls (NFP) report restored confidence in the Federal Reserve’s decision to hike rates later this year, when some such as the International Monetary Fund Managing Director Christine Lagarde questioned those plans.

Representatives from the seven major economies will meet in Germany next week. Leaders from Canada, France, Germany, Italy, Japan, the United Kingdom and the United States will go through an agenda that is sure to include the Greek debt crisis, global interest rates, and the environment. Other current topics sure to be on the list include energy and Russia. Having such a large collection of global heads of state, finance and monetary policy leaders will make for a deluge of statements from highly influential individuals, which is a reason to keep an eye on the proceedings.

The USD faces new challenges in the coming week. The U.S. retail sales indicator has stopped dollar rallies in the past. It will be the case again if American consumers have not turned their energy and food savings into spending. Sales including auto were 0.0% last month. The forecast for next week is 1.1% growth. The market will punish failure to outperform expectations with a dollar selloff and there will be more questions around the Fed’s plans to raise rates. The impressive NFP report for May has restored confidence in the central’s bank pending decision, but further evidence of the same factors that stunted growth in the first quarter will once again raise doubts.

Monday, June 8
All day G7 meetings
Tuesday, June 9
10:50pm AUD RBA Govenor Stevens speaks
Wednesday, June 10
4:30am GBP manufacturing production m/m
4:00pm GBP BOE Governor Carney speaks
5:00pm NZD official cash rate
9:30pm AUD employment change
Thursday, June 11
1:30am CNY industrial production year-over-year
8:30am USD core retail sales, month-over-month
8:30am USD unemployment claims
11:15am CAD BOC Governor Poloz speaks
Friday, June 12
8:30am USD PPI m/m
10:00am USD prelim UoM consumer sentiment

 Australian GDP Surprise Not Enough to Offset Negative Data

For the second consecutive day, the AUD/USD fell. Australian retail sales numbers and trade data had weakened the Aussie dollar ahead of the U.S. nonfarm payrolls (NFP) report. Australian retail sales were expected to rise 0.3% but the release was flat at 0.0%, and the country’s trade data which was released at the same time posted the worst deficit in Aussie history as imports keep rising with decreasing exports. The trade gap is now $3.88 billion above the expected $2.25 billion.

Australia posted a strong 0.9% quarterly growth on June 2, but the following day the weakness of the trade and retail sales data left the AUD wide open for a downward move if the U.S. employment report came in above expectations, and that is exactly what happened. The NFP report showed that the American economy added 280,000 new jobs, crushing expectations of 222,000. The unemployment rate went up to 5.5%, but the headline number and wage inflation component boosted the USD across the board versus major pairs.

Next week, Reserve Bank of Australia (RBA) Governor Glenn Stevens will be in Melbourne to address the Economic Society of Australia. The central bank held rates untouched at 2% on June 1 which prompted the AUD to rise versus the USD ahead of the data releases that defined the fate of the AUD/USD. Stevens probably welcomed the rise in U.S. employment as a Federal Reserve benchmark interest rate hike would make his job of boosting the economy much easier with the help of a weaker AUD. The underperforming Australian indicators are a concern as the RBA has limited room to maneuver if it wants to continue its easing monetary policy.

The employment data released on June 10 could undo whatever verbal intervention Stevens manages to pull off. The expectations are for Australia to gain more than 15,000 jobs and keep the unemployment rate at 6.2%. Underperformance by such a vital component of the economy would pressure the RBA to cut rates once again, after having done so twice this year.

Australian dollar events to watch this week:

Tuesday, June 9 at 10:50 p.m. — AUD RBA Govenor Stevens speaks
Wednesday, June 10 at 9:30 p.m. — AUD employment change

*All times EDT

For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

US Retail Sales Could Derail NFP Rally

The U.S. nonfarm payrolls (NFP) report for May did not disappoint. On the contrary: it surpassed expectations and may have increased the likelihood of a Federal Reserve rate hike before summer’s end.

U.S. jobs data tends to move the forex market in one direction or other, thus earning a reputation as one of the biggest economic indicators to currency traders. The USD had been on a back foot in June as the American economy continued to show signs of a possible second quarter of sluggish growth. The greenback needed a lift after the purchasing managers’ numbers in manufacturing and non-manufacturing surveys offered only mixed results in a week rife with major economic releases. Optimism for a strong NFP started to gain traction after U.S. unemployment claims and the ADP private payrolls data beat expectations.

Employment has been the strongest pillar on which the Fed has built its case for an economy that can sustain higher interest rates. The NFP validated that thinking although several questions were raised about how transitory the factors were that plagued the first quarter of 2015, and how likely they were to affect the second quarter. What a difference a strong release makes. Now, a rate hike seems plausible once more. June has already been ruled out by Fed Chair Janet Yellen, but September or October could prove to be the moment of truth. September may be more likely given there is a press conference scheduled following the monetary policy statement. The Fed could use the opportunity to address any concerns from investors and avoid any miscommunication. A rate hike this year seems inevitable, even after the International Monetary Fund’s Managing Director Christine Lagarde advised the U.S. central bank to delay tightening its monetary policy until next year.

Frugal Americans Confound Economists

The USD will continue to face significant hurdles such as flagging retail sales that have disappointed all year long, stumping economists who expected the savings consumers accumulated from cheaper food and oil to be spent. Consumer confidence would have also supported that theory with an improving sentiment, yet the reality is that Americans are opting to save or reduce debt, in turn hurting retail sales and further impairing economic growth.

U.S. retails sales are forecasted to be 1.1% after a 0.0% reading last month. Core retail sales, excluding auto, are expected at 0.7% after a disappointing 0.1% reading on May 13.

The University of Michigan’s consumer sentiment survey will be released on June 12. Although the sample is small — 500 people — the results have been indicative of the shifting confidence of the American consumer. Last month the preliminary data came in lower-than-expected at 88.6, only to be later revised to 90.7, but still below the expected 95.8 points. If the U.S. is set to shake off the malaise of the first quarter, both consumer confidence and the living proof of that improved sentiment via spending are needed to see the American economy return to a faster pace of growth.

U.S. economic events to watch this week:

Thursday, June 11
8:30 a.m. — USD core retail sales, month-over-month
8:30 a.m. — USD unemployment claims
Friday, June 12
8:30 a.m. — USD producer-price index, month-over-month
10:00 a.m. — USD preliminary UoM consumer sentiment data

*All times EDT

For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza