Higher Retail Sales Fails to Help


This pace of spending cannot be sustained and skepticism towards future spending has driven the EUR/USD below 1.28. According to our technical analyst at FX360, intraday EUR/USD support is at 1.2785.

Also, here is why retail sales is increasing! This was the line at the Barney’s Warehouse Sale this morning in NY. At 7:11am, 50 people were on line and by 8, the line was down the block and around the corner. Luxury discounters are cutting prices significantly and if these people are lining up to shop today, it leads me to wonder, do they have a job?

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US Dollar Forecast: What’s In Store for 2009?


3 Themes for 2009: The US economy and the dollar’s fate in the years ahead could be determined by what happens in 2009. We are focusing on 3 big themes that will impact the US dollar and each of these themes encompasses a lot.


Therefore non-farm payrolls could double dip, just as it has in past recessions. In this case, we would expect a rebound followed by another sharp loss that rivals November’s job cuts. A rise in unemployment spreads into incomes, spending and then usually leads to more layoffs. We need to see this toxic cycle end before we can see a recovery. Consumer spending has already been very weak and the trade deficit is widening as the dollar strengthens. As the 2 primary inputs into GDP, we expect fourth quarter growth to be very weak. The strength of the US dollar in Q3 and for most of Q4 will also take a big bite out of corporate earnings, leading to disappointments for the stock market. This is why we expect more weakness in the US dollar and the US economy in the first quarter of 2009. However towards the middle of the second quarter, we may begin to see the US economy stabilize as it starts to reap the benefits of Quantitative Easing and President Barack Obama’s fiscal stimulus plan. New Administrations usually hit the ground running and as such we fully expect the rest of the TARP funds to be tapped shortly after his inauguration. The shape of the US recovery will have a big impact on the price action of the US dollar and the path to a stronger dollar will be through a weaker one.


2. Safety vs. Yield: The dollar’s rally in the second half of 2008 has been largely driven by risk aversion, deleveraging and repatriation. In other words, despite the next to nothing yield offered by dollar denominated investments, a flight safety into US dollars and government bonds has kept the US dollar from collapsing against
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Dollar Unfazed By Mixed Economic Data





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Why Does the Drop in Oil Prices Matter?


Since those highs, oil prices have plunged more than 70 percent and gas prices are down more than 50 percent. If we discount the run up in the first half of the year, we have still seen a 55 percent drop in oil prices since January.

Crude prices matter for a variety of reasons. Lower oil prices help to cushion the ever dwindling pocketbooks of US consumers. In addition, oil has a direct correlation with consumer prices. With CPI falling for 2 consecutive months, the risk of deflation is growing.

Take a look at the strong correlation between the price of oil and consumer prices.

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Retail Sales and PPI Still Stink

US retail sales and producer prices were basically in line with expectations but that does not undermine the fact that the data was very weak and confirms that the Federal Reserve will be cutting interest rates by 75bp next week. USD/JPY hit a 13 year low last night after news that the automaker bailout plan is not going happen before the new year. Everyone had hoped that the automaker saga would come to an end, but lawmakers are not letting that happen. On Wednesday, I said that USD/JPY could hit to a new 13 year. At that time, the currency pair was trading at 92.50-93.00. The possibility of the US taking interest rates below Japanese levels should keep the US dollar soft going into the Fed interest rate decision on Tuesday.

Consumer spending fell for the fifth month in a row while producer prices dropped for the second straight month. The two biggest inputs into GDP are retail sales and trade. Consumers cut back spending more aggressively in October and November which suggests that GDP growth could take a big dive in the fourth quarter, especially with the widening of the trade deficit.

GDP Could Contract by 4 to 6% in Q4

GDP could decline as much as 4 to 6 percent in Q4, which would be the largest contraction in growth since the 1980s. In the first quarter of 1982, GDP fell -6.4 percent. A 4 to 6 percent drop in GDP would not be out of the ordinary given the current conditions in the US economy. In the fourth quarter of 1990, GDP contracted by 3 percent and in the first quarter of 1991, it contracted by 2 percent. The currrent recession is worse than the one the US economy experienced in the 1990s, so a contraction in growth exceeding 3 percent would actually be expected.

The biggest drop in consumer spending came from gasoline station receipts. Prices at the pump have fallen more than 50 percent since the summer and gas stations are suffering as a result. The only silver lining in the retail sales report is the fact that not every sector saw slower sales. Electronics and sporting goods were in demand but this rebound after at least 4 consecutive months of softer spending is probably related to Black Friday sales.

BTW: EUR/GBP is at the brink of hitting 90 cents – a move that I called on Dec 8

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