We will get a Correction in Euro to US Dollar

Foreign Exchange Currency Outlook : Retail sales today has the potential to damage the US dollar rally. Bloomberg says the consensus forecast is for a drop of 0.1% after a gain of 0.1% the previous month (with a wide forecast range of –1% to +0.6%. We say that if it’s a drop of 0.1%, that’s too small to draw any conclusions. Ex-autos, retail sales probably rose 0.5 percent, but that includes sales at gas stations. At the same time we get July import prices, probably a rise by 1%, pretty tame after 2.6% in June (on oil prices).

Just because data doesn’t support a gloomy deduction doesn’t mean Foreign Exchange traders won’t choose to do it anyway. In fact, if the US Dollar holds its ground on bad retail data, it’s a splendid sign the trend is, indeed, entrenched. Tomorrow we get eurozone GDP and expectations there are strong for a bad outcome -0.2%. It’s not hard to do the permutations and combinations to get the effect on the US Dollar. Good US retail sales + bad eurozone GDP = ongoing dollar rally (the current thinking). Bad retail sales + good eurozone GDP = corrective bounce up in the Euro to US Dollar. And so on. Other factors do exist, of course, including the price of oil, the process of yen carry trade unwinding, more news from the financial sector, and so on.

Unfortunately, factors don’t live in a vacuum. Some traders see a correction coming in oil prices since oil went up a bit and from this they deduce the US Dollar “should” fall.

To this we say poppycock.

Oil is moving down in a meaningful way and carrying other commodities with it. The WSJ has a hilarious story this morning about cotton—are speculators posing as hedgers driving the price up unreasonably beyond normal supply and demand? Gee.

Of course we will get a correction in euro to US dollar. Prices don’t move in straight lines. The round number 1.5000 is the new barrier—we had a level over it on Monday (1.6084) and now dollar bulls want to be sure it doesn’t get there again. That would mean that the upcoming correction would be in the sub 1.5000 area, and we can start talking about minor correction points like 1.4850.

We think that worries about eurozone growth will suffice, especially after the IFO confidence numbers today. And it’s also possible that the drop in Pound and Australian Dollars will be offset by the (temporary) rise in the Japanese Yen so that the US dollar is net even. That pulls additional new dollar bulls into the fray. We confess to being a little confused as to why the Canadian dollar is recovering, and let’s note that the Mexican peso rose on the day, but we can probably assume that these moves are due to local conditions and not necessarily sentiment toward the US dollar.

In fact, the worst thing on the charts today is gold breaking all kinds of important milestone levels including its own new downchannel. That means it’s oversold. In the sad way of the world, a rise in gold implies a drop in the dollar.

It would be too bad if an authentic US Dollar rally gets derailed because of something as dumb as a correction in gold.

Bye For Now

Barbara Rockefeller

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