Major currencies directionless ahead of US retail sales data

The major currencies remained relatively directionless during listless August trading on Thursday.

There has not been a huge amount to write home about this week, with no real major economic data releases out yesterday. That being said, investors did have the weekly US jobless claims data to digest, which actually came in much stronger-than-expected. The number of those Americans newly claiming unemployment benefits slowed below one million last week for the first time since the beginning of the lockdowns (963,000). While this appears highly encouraging at first glance, it is worth noting that the data is likely being suppressed by the expiration of the US government's additional $600 a week benefit supplement. This is almost certain to be discouraging those freshly laid off from filing for unemployment benefits that otherwise would have done had the extra benefits still been available.

Figure 1: US Initial Jobless Claims (2020)

Source: Refinitiv Datastream Date: 14/08/2020

There still remains no word out of Congress regarding an extension to the aforementioned extra benefits. Somewhat surprisingly, the dollar has continued to largely hold its own this week, despite the lack of breakthrough, currently trading more-or-less unchanged versus the euro. Some weak data out of China overnight has helped the dollar’s cause to some extent. Retail sales in Asia’s largest economy unexpectedly remained in negative territory for the seventh month in a row year-on-year in July. This has raised concerns over the pace of the Chinese and indeed global economy, leading to the traditional flurry of bets in favour of the safe-havens, the dollar included. An increase in virus cases in areas such as New Zealand and South Korea may also be fuelling this flock to safety.

Will today’s US retail sales data shift the dollar?

Activity should pick-up in the currency markets today. We don’t expect too much volatility to follow the updated second quarter GDP data for the Euro Area, which is expected to remain unrevised. Investors are, however, likely to be paying very close attention to this afternoon’s US retail sales figures, which should give the market a decent indication as to how well the world’s largest economy is emerging from its covid-induced slump.

Sales are expected to have grown at a slower pace in July than a month previous (1.9% versus the 7.5% MoM increase in June). While much of this slower rebound will be due to a higher base effect, the re-imposition of shutdown measures in a handful of US states may have also driven consumer spending lower. We think that any number in the +1-3% range is unlikely to materially shift the US dollar. It may take a number materially higher than consensus to lead to anything more than a temporary rally in the greenback, in our view, given the still lack of agreement in Congress. House Speaker Pelosi’s comments that the Republicans and Democrats remain ‘miles apart’ suggests a deal may not be in the offing any time soon.