Dollar Mixed Ahead of US Retail Sales Data

  • It has been a bumpy week for global equity markets; the dollar continues to get traction
  • House Democrats will go ahead with a vote today on a new stimulus package worth $3 trln; US data highlight will be April retail sales
  • Brazil is intervening more aggressively; Mexico cut rates 50 bp, as expected
  • The EU has threatened a lawsuit against the UK over free movement; Germany’s preliminary Q1 growth figures came in close to the dire market forecasts
  • EUR/CHF is trading at the lowest levels since July 2015; China reported April IP and retail sales

The dollar is mixed against the majors ahead of US retail sales data.  Yen and euro are outperforming, while the Scandies are underperforming.  EM currencies are mixed too.  CZK and IDR are outperforming, while PHP and MYR are underperforming.  MSCI Asia Pacific was up 0.2% on the day, with the Nikkei rising 0.6%.  MSCI EM is up 0.1% so far today, with the Shanghai Composite falling 0.1%.  Euro Stoxx 600 is up 1.2% near midday, while US futures are pointing to a lower open.  10-year UST yield is down 1 bp at 0.61%, while the 3-month to 10-year spread is down 1 bp at +50 bp.  Commodity prices are mostly higher, with Brent oil up 1.9%, WTI oil up 1.9%, copper up 0.2%, and gold up 0.1%.

It has been a bumpy week for global equity markets, with most ending on the red at the time of writing. The S&P (futures) is currently down 2.5% and EuroStoxx 600 down 3.0% on the week. The UK FTSE 100 is down about 2.0% and the Nikkei 0.7%. Lastly, it has also been a rare week of EM outperformance (+1.0%), according to MSCI EM ETF.

The dollar continues to get traction.  It is up against every major currency this week except NOK, and up against every EM currency except TRY, CLP, THB, and IDR.  DXY traded yesterday near 100.556, the highest since April 24.  It has since given up some of those gains but we still target that day’s high near 100.867.  The euro continues to flirt with the $1.08 area and remains heavy, while sterling is barely holding above the $1.22 area and is around the lowest level since April 7.  Given the still-high Brexit and EU risks, we suspect both currencies will continue to move lower (see below).  USD/JPY remains stuck around 107.



House Democrats will go ahead with a vote today on a new stimulus package worth $3 trln.  There was no Republican input and Speaker Pelosi is basically daring Republicans to reject the bill ahead of November elections.  President Trump has threatened to veto it.  Senate Majority Leader McConnell has called the package a “left-wing wish list” but he seems to be softening his stance and admitted last night that “there is a high likelihood that there will be another bill.”

The US data highlight will be April retail sales.  Headline sales are expected to plunge -12.0% m/m, while ex-autos are expected to fall -8.5% m/m.  Lastly, the so-called control group used for GDP calculations is expected to fall -5.0% m/m.  A horrible April is a given and May sales will also be weak.  The real question for markets is whether the tentative steps taken to reopen will translate into the start of a recovery in June.  If China is any indication (see below), it will take some time for consumption to come back.

The regional Fed manufacturing surveys for May start to roll out.  First up is the Empire survey today, which is expected at -60.0 vs. -78.2 in April.  We get more manufacturing data with April IP, which is expected to plunge -12.0% m/m.  March JOLTS job openings, business inventories, TIC flows, and preliminary May University of Michigan consumer sentiment will also be reported today.

Brazil central bank intervened aggressively yesterday in an attempt to stop the BRL underperformance.  Besides offering a larger than normal amount of FX swaps, the bank also sold $1 bln spot.  This was a discretionary spot sale that BCB saves for special occasions.  For instance, BCB held a spot auction April 27, two on April 24, one April 20, and one each April 2 and 3.  Most of those days, USD/BRL was making new highs.  Yet it’s worth noting that all of the previous spot auctions did not prevent the real from weakening further.

Banco de Mexico delivered the expected 50 bps cut to 5.50% yesterday. The decision was unanimous and rate cuts should continue, probably at the current pace. The bank’s forward guidance kept the focus on taking action “on the basis of incoming information,” which doesn’t seem especially dovish to us. The peso outperformed most EM currencies yesterday, up 1.2% against the dollar, though in line with the move in the Brazilian real.  Year to date, however, it remains one of the worst hit, down 20%.



Complicating the already contentious post-Brexit negotiations, the EU has threatened a lawsuit against the UK over free movement. This refers to recent legislative measures such as a lifetime ban on re-entry for those who have been deported, as well as making it harder for EU citizens to claim welfare benefits. Recall that the UK has also taken a hard line on contentions negotiating items such as the ECJ and fishing rules.  All this comes ahead of tomorrow’s progress report by both sides on the recent negotiations, which surely won’t be optimistic.

Sterling has had a wild right this year but has mostly recovered from the March selloff. Sterling and euro have largely been an ugly contest, each with its own set of issues, but on net sterling is still down 4% against the single currency this year.  Both are saddled with weak data and dovish central banks, but the Brexit issue is potentially more harmful for the UK than for the EU.  EUR/GBP appears to have put in a bottom near the .87 area, which also coincided with the 200-day moving average at the time.  Initial upside targets for the cross are .8988 and .9085.

Germany’s preliminary Q1 growth figures came in close to the dire market forecasts. On a seasonally adjusted basis, the economy contracted -1.9% y/y vs. a revised +0.2% in Q4. This is better than what was seen in France (-5.4% y/y) and Italy (-4.8% y/y), in part because the German lockdown started later, pushing more of the damage to Q2.  That said, we think Germany has better grounds for a faster recovery given the pre-announced re-opening plans and substantial fiscal stimulus in the pipeline.  Overall eurozone GDP contracted -3.2% y/y.

EUR/CHF is trading at the lowest levels since July 2015.  Safe haven flows have pushed this pair down to test the 1.05 area.  This despite more aggressive FX intervention and increased jawboning by Swiss policymakers.  Some have even threatened to take rates more negative.  We are sure the Swiss National Bank will fight this move every step of the way, mostly via intervention, but the charts point to an eventual test of the April 2015 low near 1.02345.


China reported April IP and retail sales.  IP swung back to positive in April, coming in at 3.9% y/y vs. 1.5% expected and -1.1% in March. This was the first positive reading all year.  Retail sales, however, continued to contract sharply. The April print was -16.2% y/y, worse than expected -15.6% and not far from the March figure of -19.0%.  This suggest that the government’s fiscal efforts are bearing fruit, but the consumer side still looks like a drag on activity.  This underscores the problem that every country coming out of lockdown faces.  That is, factories may start humming again but consumers may remain reluctant to go out and spend.