Dollar: Expect Slow Grind Lower After U.S. Data
For the second month in a row, U.S. consumers cut back spending as the government led recovery slows. The U.S. economy has come a long way since entering into recession in December 2007 but the path to the exit has been long and exhausting. Unemployment rolls remain very high and most people have only found part time government work, forcing all consumers to be more conservative. There may no breadlines, but frugality has become a way of life.
Retail sales fell 0.5 percent in the month of June, which was slightly more than the market had anticipated. The number could have been a lot worse considering that most clothing retailers posted a decrease in revenue last month. However the selloff in the dollar was limited because the details was not as ugly as the headline number thanks partially to a late Memorial Day weekend which added approximately 1 percent to spending. Retail sales excluding autos and gas also rose 0.1 percent. Contrary to the ICSC and Redbook reports which showed that retailers were struggling, Americans bought more clothing and electronics last month. The biggest cutbacks were made in furniture, building materials, sporting goods and gas station receipts as gas prices fell to a 3 month low. At the same time, the retail sales report was far from positive for the dollar, particularly after you factor in the downward revision to the prior month.
Meanwhile the change in import prices is extremely dollar bearish and will probably lead to a slow grind lower in USD/JPY. The cost of imported oil, business equipment and consumer goods fell 1.3 percent in June, the largest decline since January 2009. Weaker demand from China, softer commodity prices and a strong data has kept a very tight lid on inflation. In fact, the import price numbers flash deflationary signals which will keep the Federal Reserve at bay.
The minutes from the most recent monetary policy meeting are scheduled for release this afternoon. The latest comments from Bernanke suggests that he is still very worried about the outlook for the U.S. economy and therefore we expect the minutes to contain a very subdued tone, which could weigh on the dollar.
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