This has been a great week for the US dollar and the US retail sales report was the icing on the cake. The greenback soared against all of the major currencies after Friday’s release showed consumer spending rising 0.5% in the month of May. This was slightly lower than expected but excluding gas and auto sales, retail sales beat expectations. Yet the main reason why the dollar took flight was because of revisions. Rather than falling -0.2% retail sales increased by 0.3% in April. This means that consumer appetite in the US is stronger than what was previously reported. Going into the report, investors were bracing for the worst but they were pleasantly surprised by the robustness of spending over the past 2 months. The Federal Reserve meets next week and these numbers go a long way in easing concerns about the economy after the abysmal non-farm payrolls report. While many major currencies were hit hard by the dollar’s rise on Friday, the losses in Japanese Yen or gains in USD/JPY were modest. Unfortunately the pair has been hampered by yields, which fell sharply this week.
The worst performing currency was the New Zealand dollar, which fell more than 2% against the greenback. New Zealand has been hit hard by the slowdown in China and Australia – manufacturing activity stagnated for the first time in 4 years with the PMI manufacturing index slipping to its lowest level since March 2011. First quarter GDP numbers are scheduled for release next week and given the recent rate cut, softness in spending and weaker manufacturing, growth should have slowed in the first 3 months of the year. NZD/USD is trading just above 8-month lows and further gains in the dollar could put the pair on a track to test its 2015 low near 62 cents.
All other major currencies like the euro, sterling, Australian and Canadian dollars also weakened with AUD/USD seeing 5 straight days of losses. The question of whether these declines continue will be determined by next week’s Federal Reserve and Bank of England monetary policy announcements. The Bank of Japan also has a meeting but theirs will be the most yawn inducing. The June Federal Reserve meeting is the most important event of the month. Central bank rate decisions are always significant but the Fed will also be updating their economic projections and dot plot forecasts. Fed Chairman Powell will hold a press conference where reporters will surely pressure him for details on his recent comments. If he spends more time talking about their willingness to “act as appropriate to sustain expansion” than the underlying strength in the labor market and economy, we will see a meaningful pullback in the currency. Otherwise its full steam ahead for the greenback.