Good Data Lifts the Dollar

• Good Data Lifts the Dollar
• EUR - ECB Eases Collateral Requirements
• GBP - Retail Sales Growth Slows After a Solid May
• AUD Selling Resumes on Back of Weaker Data
• NZD - Consumer Confidence Declines
• CAD - Wholesale Sales Surge in May
• JPY - Sharp Rise in Consumer Spending

Good Data Lifts the Dollar

The U.S. dollar ended the North American trading session higher against all of the major currencies.  This rebound in the greenback should not be surprising considering that the U.S. economy is still in recovery mode and the Federal Reserve plans to taper asset purchases this year.  No new revelations were made on Day 2 of Bernanke's testimony, which means that the main takeaway from the Fed Chairman's time with Congress is that Bernanke is in no rush to raise rates and while reducing asset purchases is their intention, there is no preset course for how that could happen.  On balance, this leaves Fed policy less dovish than many other central banks around the world including the ECB who just eased collateral rules this morning. This dynamic explains why investors are once again snapping up U.S. dollars.

The optimism in yesterday's Beige Book report was reinforced by today's economic releases.  The central bank said that hiring is steady or increasing at a measured pace in most Fed districts which is reinforced by the decline in jobless claims.  For the week ended July 13, claims dropped to a 2 month low as the effects of auto plant shutdowns begin to ease.  However continuing claims rose to 3.114 million from 3.023 million to its highest level in 5 months.  Nonetheless, we are still seeing gradual improvements in the labor market, which support the case for a reduction in asset purchases.  The Philadelphia Fed survey also surged from 12.5 to 19.8, its strongest reading since March 2011.  The significant improvements in NY and Philadelphia manufacturing conditions are also consistent with the Beige Book report.  The only dampening data was leading indicators, which was flat in June but we don't think that will affect the central bank's bias to ease. 

Looking ahead there are no U.S. economic reports on the calendar tomorrow and while we expect the dollar to continue to rise, the greenback is nearing key resistance levels against many of the major currencies (1.30 in EUR/USD, July high of 101.55 in USD/JPY and 90 cents in the AUD/USD) so it will be interesting to see if there is enough momentum to push higher.

EUR - ECB Eases Collateral Requirements

The euro traded slightly lower against the U.S. dollar today on the back of weaker economic data and relaxation of collateral rules by the European Central Bank.  The Eurozone's current account surplus shrank from 23.8B to 19.6B in the month of May.  This deterioration is not surprising considering that Germany reported a smaller surplus and France reported a larger deficit for the same month.  It has been a quiet week for Eurozone data with EUR/USD trapped between 1.30 and 1.32.  The biggest news out of Europe this morning was the ECB's decision to ease collateral rules. They cut the minimum rating for acceptable Asset Backed Securities to 2 A ratings from 2 AAA ratings and reduced the haircut for these assets to 10% from 16% and 22% from 26%.    In doing, they are leaving more liquidity in the financial markets with the hopes that banks will lend. Unfortunately many are skeptical on whether this would be effective because the freeze up in lending is not because of the amount of cash on hand at banks but the deterioration in credit quality and increase in non-performing loans. Meanwhile Switzerland's trade balance surged to 2.73B in June from 2.12B.  Unfortunately the Swiss Franc did not benefit from the news because exports rose 2.3%, but imports dropped 3.2%.

GBP - Retail Sales Growth Slows After a Solid May

The British pound extended its gains against the euro and Japanese Yen but ended the North American session unchanged against the U.S. dollar.  Retail sales grew 0.2%, which was less than expected in the month of June but on annualized basis spending growth accelerated to 2.2% from 2.1%.  Spending less autos and gas rose 0.2% with the annualized growth rate dropping to 2.1% from an upwardly revised 2.3%. While retail sales growth slowed dramatically in the month of June, the modest rise follows strong spending in May.  Discounting by retailers continue to lure in customers, keeping overall retail sales growth in Q2 steady compared to Q1.  Recent U.K. reports have not been terrible so it will be interesting to see how the Bank of England feels about the outlook for the economy when their Quarterly Inflation Report is released next month.  In the meantime there is quite a bit of technical resistance at 1.53 for the GBP/USD.  Public sector finances are scheduled for release tomorrow and a small deterioration is expected. 

AUD Selling Resumes on Back of Weaker Data

The Australian dollar traded sharply lower against the greenback, resuming a downtrend that has the currency poised for another test of 90 cents against the U.S. dollar.  The latest round of weakness was sparked by a decline in second quarter business confidence and leading indicators.  According to the National Australia Bank, business confidence turned negative last quarter and this survey measures a broader base of companies than the monthly report.  This data confirms that slower growth in China and Australia has negative affected business conditions and business sentiment.  The New Zealand dollar also declined but not nearly as much as the Australian dollar.  Consumer confidence in New Zealand dropped 3.3% in the month of July from a 3 year high, due in part to concerns about Australian growth. The Canadian dollar on the other hand ended the day virtually unchanged thanks in part to a 2.3% surge in wholesale sales. While this is not a closely followed report, we feel that it is a good leading indicator for retail sales growth, which is due for release next week.  On Friday, we have New Zealand credit card spending and Canadian consumer prices scheduled for release.

JPY - Sharp Rise in Consumer Spending

The Japanese Yen traded lower against all of the major currencies today except for the Australian dollar, which continues to come under heavy selling pressure on concerns about domestic and global growth.  Last night's economic reports from Japan were strong with nationwide and Tokyo department store sales rising at their fastest pace since March 2012.  Considering that wage growth in Japan has slowed, the 7.2% growth in nationwide sales and 9.4% growth in spending in Tokyo signals significant improvement in consumer appetite that should have contributed positively to second quarter GDP growth.   However the Yen did not receive any lift from the data and instead weakened as the polls show a LDP win in Sunday's Upper House elections.  If Abe's party is successful in securing a victory, it suggests that the party would attempt to push through structural reforms including an expansion of their stimulus program later this year. The Ministry of Finance will be releasing its weekly portfolio flow data and we will be watching closely to see if the Japanese were net buyers of foreign bonds for the second week in a row, a trend that would be extremely supportive of USD/JPY.  The all industry activity, leading and coincident indices are also scheduled for release but the impact of these reports should be limited.