Retail Sales Should be Positive for the Dollar but...

This morning's stronger than expected U.S. retail sales report should have been overwhelmingly positive for the dollar and while we did see the greenback appreciate after the release, it has now given up all of its gains versus the Japanese Yen. Investors have to look no further than Treasury yields for an explanation on the lack of momentum in the dollar. After the initial release of retail sales, 10 year Treasury yields rose as much as 3bp, which is anemic to begin with but since then yields have pulled back and are up only 0.5bp at the time of publication. Despite back-to-back improvements in U.S. data, investors are unimpressed. As long as the U.S. economy recovers at a steady pace, the Federal Reserve will continue to taper and bring asset purchases down to zero by the end of the year. Last month, Fed Chairwoman Janet Yellen said rates will increase 6 months after QE ends but since then, traders have dialed back expectations after policymakers stressed the need for low rates. Until more Fed officials get on board with the idea of tightening, the dollar will have a tough time recovering.

Nonetheless, this does not draw away from the strength of today's consumer spending report. Retail sales beat expectations, rising 1.1% in the month of March compared to a 0.9% forecast. Although the February figures were also revised up to 0.7% from 0.3%, we pointed out in our Friday note that sales needed to increase 1.5% or more to get investors excited about buying dollars. Excluding auto and gas purchases, sales rose 1.0%, the strongest pace since February 2012. Taking a look at the overall increase in spending since the beginning of the year, retail sales will contribute positive to GDP growth in the first quarter. These good numbers lifted U.S. stocks but should be providing more support to the dollar but unfortunately the greenback won't be able to rise without an increase in yields.

Stocks are performing well today but if earnings continue to surprise to the downside, the rally could recede, adding pressure on USD/JPY. The only hope for the dollar at this stage would be comments from policymakers like Janet Yellen but they want yields to remain low and therefore we doubt they will say anything to threaten the downtrend.