US consumer confidence and housing data can strengthen the Dollar

Fundamental View

An interesting development in the Eurozone QE space today as some Investment Banks are calling ECB Quantitative Easing in next week’s meeting. However we feel that this view does not take into account the December tranche of Targeted Long Term Repayment Operations. The take up of this should determine the ECB’s Quantitative Easing calendar as the effects of these take a while to be seen in the general economic picture. We also see Spanish Government debt at an all-time high with the cost of borrowing the cheapest in the Spanish bond’s history. This pricing in of ECB QE is representative of market participants assuming that it is inevitable, with ultra-low yields to reflect this. Today we saw Italian retail sales post higher than previous months this morning, coming in at -0.5% against a previous -3.1%, which was revised up. This assisted ESTOXX and the DAX to make new highs for the session with the DAX testing the September high and the 9900 handle. Italy’s retail sales are one of the key linchpins in Italy’s economic recovery; however this can only be achieved through an improvement in the employment space. Weidmann of the Bundesbank is correct in stating that the only real way to achieve a tangible improvement in unemployment is wide-spread structural reform, targeting jobs creation. Although Renzi is attempting this currently it is difficult for any fiscal policy changes to progress at pace. Comparing the Italian retail sales to that of the UK, we can see that the disparity between the two readings is down to broad-based unemployment in the peripheral European nation. Following Italian Retail sales and the march higher in stocks, the OECD released their growth forecast for 2015, cutting the World GDP from 3.90% to 3.70%. They held the US growth forecast but cut the Eurozone, emphasising the divergence between nations.

Today’s View

With a pickup in the data calendar ahead of Thanksgiving on Thursday, we have US housing data this afternoon and also Consumer Confidence. The latter is expected at 96, with a previous reading of 94.5. This has the potential to further strengthen the dollar against the Euro and with the OECD comments earlier this morning it could amplify the slightly weaker Euro we have seen since QE has come on the cards. With regards to oil, ahead of the OPEC meeting on Thursday we have seen Abd Al-Mahdi, the Iraqi OPEC representative, enter the space saying that oil prices are far too low and something needs to be done. This commentary could hold implications that Iraq are moving towards a production cut in a bid to stave off the fall in crude prices. As this would position the majority of OPEC against the Saudi Arabian oil producers, this would add to pressure in this space and strengthen our view of a rally in crude. If the Saudi Arabians cut their production by circa 1m barrels it is likely that oil will reverse. We see stocks continuing higher this session, depending on Consumer Confidence with T-notes taking an inverse move to both stocks and the Bund.

Alternative View

Today’s data session is likely to be fast and furious. It is recommended that traders remain data-wary as we have reports coming in from multiple facets of the US Economy. Housing data and Consumer Confidence to take precedent.