Dollar Bulls Charge Ahead as Data Validates Rally

The Dow Jones Industrial Average climbed to fresh record highs while the US dollar rose to its strongest level in 8 months against the Japanese Yen on the back of stronger retail sales. After weeks of disappointing economic reports, investors wanted to see data validate the rallies so they jumped on the report when it released, driving equities and currencies higher. Is the US economy out of the woods? Certainly not, but given how the market shrugged off softer releases like non-farm payrolls and CPI, a strong report was bound to have a bigger impact on the greenback than a weak one. Despite slower wage growth, consumer spending rose 0.3% in the month of December. This was in line but excluding autos and gas, spending rose 0.5% at the end of the year and manufacturing activity in the Philadelphia region recovered strongly at the start of the year.

However as encouraging as that may be, its also important to acknowledge the downward revision to the core numbers in November and the sluggish holiday sales numbers reported by Target yesterday. Spending in December may have been healthy but 2020 could be a challenge for retailers alike. Yet US policymakers remain optimistic with Fed Presidents Kashkari, Kaplan and Bowman expounding the positive outlook of the labor and housing market. The White House also teased the possibility of a tax cut which helps the rally. The Phase 1 China-US trade deal is also done and while its lacking in many ways, the hope is that trade tensions won't be an issue for the next few months. Tomorrow's housing and consumer confidence numbers are not expected to have a dramatic impact on the market but the relationship with Iran leaves the risk to the downside for sentiment.

One of the best performing currencies today was sterling and its strength is surprising given recent data and the talk of a rate cut this year. Sterling edged higher for the third day in a row and the only explanation is optimism ahead of the December retail sales report. According to the British Retail Consortium, demand was strong but that does not diminish the weakness that we've seen in industrial production and inflation. UK Prime Minister Boris Johnson also admitted that they may not be able to reach a trade deal with the EU this year. None of this is good for the UK and as things stand, rate cuts will certainly be on the minds of UK central bankers.

Euro pulled back after the ECB minutes from the December meeting revealed that "policy could be adjusted to reduce unwanted side effects." However with a "solid upward trend in underlying inflation ex holiday costs," Eurozone policymakers are in no rush to ease. Compared to other countries, we continue to see stabilization and improvement in the economy.

The Canadian and Australian dollars also lost value despite stronger Australian housing data this week. Despite the more than 1% rise in oil prices and stronger US data, the rally in USD/CAD is losing momentum. There's no specific explanation for the underperformance in AUD today outside of the broader US dollar rally but Chinese GDP, industrial production and retail sales numbers are scheduled for release and investors could be worried about the results. In contrast the best performing currency today was the New Zealand dollar. NZD shrugged off unexpectedly weak credit card spending numbers rising in favor of stronger house sales. Manufacturing PMI numbers are scheduled for release this afternoon and given the recent trend of data, an uptick is expected.