British Pound Climbs as Retail Activity Hits a Near-Two Year High

US Dollar's Recovery Slowed by Drop in Consumer Confidence, Grounded by Upcoming GDP Release

Euro: Outlook for Economic Recovery and Interest Rate Policy Marred by Record Drop in Private Lending

Australian and New Zealand Dollars Shirk Risk Sentiment for Interest Rate Forecasts
British Pound Climbs as Retail Activity Hits a Near-Two Year High

US Dollar’s Recovery Slowed by Drop in Consumer Confidence, Grounded by Upcoming GDP Release
Despite a round of disappointing economic data, the US dollar was still able to manage its third consecutive advance (on a trade weighted basis) and subsequently establish its best, short-term trend since August 10th. Across the majors, we can call the greenback’s progress mixed. For the market’s most liquid pair, EURUSD, the dollar’s strength was developed enough to mark a two week low and put price action in direct conflict with the primary trend of higher swing lows beginning with the early March reversal. Elsewhere, the benchmark’s strength was subdued or absent altogether. With the third quarter US GDP report due in around 36 hours, the outlook for risk appetite and the dollar’s specific attachment to broader sentiment is far too uncertain for establishing or unwinding large positions.

Despite the focus on the forthcoming growth report, today’s data offers a more timely measure of specific areas of economic activity and should not be overlooked. Topping the headlines in the morning US session was the Consumer Board’s Consumer Confidence Survey for October. This sentiment report may lag the advanced University of Michigan figure; but the small disadvantage of timeliness is more than compensated for by the detail of today’s release. The headline figure was a substantial disappointment in itself. The sentiment gauge was expected to improve slightly; but instead the indicator dropped from a positively revised 53.4 in September to 47.7. A reading under 50 denotes pessimists in the survey outnumber optimists – the first such reading in three months. The details were even more discouraging. The initial breakdown revealed the ‘Present Situation’ reading fell to its lowest level since February of 1983. This disparity reflects a greater truth of the market’s performance so far this year - that expectations are running well beyond the means of current fundamentals. This is not a unique set of circumstances to the US dollar and economy. The rest of the components reported exactly what you would expect to temper vital consumer spending: the percentage of respondents reporting jobs are hard to find rose to a 26-year high; expectations for income growth cooled; the outlook for business conditions fell and plans to make major purchases dulled. Big picture, this is a very discouraging survey when the outlook is for a meaningful recovery.

The other scheduled releases for the day would carry less weight with the speculative crowd. Though comprehensive, the S&P/Case-Shiller Home Price Index merely offers confirmation to more timely price, sales and inventory numbers. Nonetheless, the 11.32 percent year-over-year contraction in prices was the smallest in 19 months and thereby adds to a bullish bearing for housing. Off, the docket, Timothy Geithner spoke at the annual SIFMA with the same cautiously optimistic tone he has maintained for the past few months. Perhaps the most pertinent comments for currency traders were suggestions the US maintain its confidence in the US dollar and that the currency would retain its reserve status for well into the future. As if confirming his outlook, the record $44 billion auction of two year notes reported the highest level of demand (with a 3.63 bid/cover ratio) in two years and second highest in 17. The nation has found a little more time to work down its deficits.

Related Article: US Dollar Weighs 3Q GDP for Fundamental and Risk Impact

Euro: Outlook for Economic Recovery and Interest Rate Policy Marred by Record Drop in Private Lending
The economic data crossing the wires during the European session had little precedence for short-term volatility; but the Euro Zone money supply numbers for September carries with it a considerable influence on long-term fundamentals. According to the European Central Bank, M3 money supply growth through the three month period slowed to 1.8 percent – the slowest pace since records began back in 1971. What’s more, loans to households and smaller companies contracted (0.3 percent) over the year for the first time since such data was first measured back in 1992. What does this have to do with the euro? Without credit and lending, economic activity will be severely stunted. Consider, the last projections for growth in the Euro area from the IMF saw a meager 0.3 percent expansion through 2010 following a 4.2 percent slump this year. This trails the US, Japan and even the United Kingdom under comparable estimates. Ultimately, this is a gauge for market participants with an outlook beyond a few weeks. For short-term, event risk traders; tomorrow’s German CPI data will likely develop more volatility given its direct ties to interest rate expectations.
The consensus calls for a further recovery from the first bought of deflation on record with no change in the annual, preliminary reading (non-EU harmonized) for October; but without a set release time, its immediate impact will be diminished.

Australian and New Zealand Dollars Shirk Risk Sentiment for Interest Rate Forecasts
Both the Australian and New Zealand dollar’s are in set into the risk appetite rut – this is usually the case when a currency is on the extreme of the yield spectrum. RBA Governor Glenn Stevens has painted an extraordinarily hawkish picture considering the stagnant pace of the global markets. Now we will see whether his forecasts bear merit with the next round of interest-rate defining data: the third quarter CPI data. Headline inflation is likely to cool further through the period as demand softens and some of the volatile goods in the basket mark notable declines in price. It is the core data that we will be more attuned to though. Though expected to ease as well, these more stable measures are seen holding outside of the central bank’s target band and thereby making a case for a hawkish policy stance. And, while the Australian dollar is backed by the more proactive policy group, the New Zealand unit has the greater stock in forthcoming event risk. The RBNZ rate decision isn’t due until the late US session; but there is a lot of interest in the commentary that may accompany the announcement. Economists and the market are pricing in no chance of a hike; but overnight index swaps see 228 bps of hikes over the next 12 months. When will this aggressive regime begin?

British Pound Climbs as Retail Activity Hits a Near-Two Year High
Despite a long-term fundamental picture that is the scourge of the majors, the British pound has still managed its second consecutive gain through Tuesday’s session. Speculation is complicated market dynamic and it is reasonable to assume that a very dour outlook has already been priced into the currency’s future. Therefore, with risk trends cooling and a positive economic indicator on the docket, the market is balanced enough to respond. The CBI Distributive Trades index is a proprietary survey of activity in the retail group. According to the October reading, sales expanded at its fastest pace in nearly two years. Perhaps this will offset the GDP data enough to keep the BoE off QE next week.

Related Article: Will a Pass on an RBNZ Rate Hike Disappoint Even if it’s Price In?