Focus on US retail sales, with a sharp rise expected…
…so hard to see a significant drop in yields or the USD as data will be objectively strong
Commodity currencies remain attractive
The US retail sales data is the main focus of the day. We expect stimulus payments and improved weather to bring a rise of 6.6%, 6.3% ex auto. The market is looking for slightly less dramatic, but still notable strength at 5.9% m/m. Since this sort of number will be no surprise, we wouldn’t expect a big market reaction to something in the 6% region, but less than 5 or more than 7 could be expected to trigger something significant. US 10 year yields will be the market to watch for FX, with significantly higher yields likely on a 7%+ gain, leading to a stronger USD in general. Whether this proves to be across the board or focused on the high or low yielders will depend on the equity market reaction. If the equity market can hold steady in the face of higher/lower yields the biggest reaction should be in USD/JPY, as other currencies will be driven higher/lower against the JPY by the implied moves in risk premia.
At the same time as retail sales, April manufacturing surveys from the Philly Fed and Empire State will be worth watching, as will weekly initial claims after a preceding unexpected increase. The March Philly Fed survey was exceptionally strong, so a dip wouldn’t be a surprise, but it would take a big move lower to undermine confidence in the recovery. Soon after we expect March industrial production to see a strong 3.4% rebound from a weak February, with manufacturing rising by 4.1%. Following that are February business inventories and April’s NAHB homebuilders’ survey. All in all, it is still hard to see the market taking US yields much lower in the face of what look likely to be strong data, even if they don’t quite live up to high market expectations. Risks should therefore be weighted to the USD upside.
There isn’t a lot preceding the US retail sales to interest the market in European hours, but it was notable on Wednesday that the commodity currencies generally outperformed, and this continues to look like a reliable medium term theme, given the strength of the recovery that we are likely to see this year and the limits to short term commodity supply. The AUD was a strong performer on Wednesday, and may be the most reliable play, but the NOK has been strong in the last week, and having rejected the initial test of 10.00 at the end of March, looks set for another go as the oil price is approaching the end-March highs. The NOK continues to trade closely with the oil price, but at some point may also become seen as an attractive yield play as Norges Bank has indicated they are likely to be the first of the G10 to raise rates later this year.
Helped by a broadly soft dollar and higher commodity prices, AUD/USD broke to the upside on Wednesday after weeks of consolidation. A solid jobs report was unable to provide further support. While our bias is to the upside, significant gains look difficult with yield spread not indicating much support. A major surprise in today’s US retail sales data could change that. Still, moderate upside bias continues to be supported by the positive commodities outlook. A lack of key resistance before 0.78 could help the case for AUD/USD gains.