Currencies and equities traded lower on Tuesday on the back of weaker U.S. retail sales. Consumer spending grew by only 0.3% in the month of October, against expectations for a 0.5% increase. Spending growth slowed significantly from September, when demand rose 1.6%. This weakness raises concerns that with coronavirus cases surging across the nation, retail sales will slow further in the last two months of the year. With their backs against the wall and no guidance from the federal government, many states have taken their own steps to curtail the spread of the virus by banning indoor dining and ordering the closure of some businesses. Biotech companies are making solid progress towards a vaccine, but the earliest we can expect broad dissemination is spring of 2021. That means the recovery we saw in Q3 could disappear completely in Q4. As Federal Reserve Chairman Jerome Powell warned today, the recovery has significant near-term downside risks. The soft retail sales report took USD/JPY lower for the fourth day in a row. While tomorrow’s housing market and building permits reports should show an ongoing housing recovery, demand for U.S. dollars should be limited by the fear of further restrictions on business activity.
In Europe, there are early signs of the second wave slowing. Aggressive lockdowns across the continent are working, with new virus cases in Germany, France, Italy, Belgium and the Netherlands finally coming down. For some countries, like Belgium, the improvement has been dramatic. It reported nearly 30,000 cases in one day on Oct. 30. Now, the count is down to about 4,600. In Germany, the peak was above 23,000. New cases are now closer to 10,000. These are still alarmingly high numbers, but the curve is moving in the right direction. Throughout this time, the euro has been very strong, holding above 1.18 versus the U.S. dollar. One argument for the euro’s resilience is the U.S. is lagging Europe by a few weeks, which means cases in the U.S. will compound before they decline, while cases in Europe will continue to fall from their highs. While that may be true, the contraction in Europe could be deeper because tougher nationwide measures were taken and the European Central Bank made its plans to ease next month very clear, whereas the Fed hasn’t dropped any definitive hints about stimulus.
The strongest currency today was sterling. There was an article in the UK Sun that talked about the possibility of a UK-EU trade deal next week. Although very little progress has been made on Brexit negotiations, the persistence of both sides and the overall strength of sterling is a sign that investors still believe an agreement can be reached before the end of the year. Investors also liked Bank of England Governor Andrew Bailey’s optimism. He said recent vaccine news is encouraging and lifts uncertainty for businesses. UK consumer prices are scheduled for release tomorrow, and the recent uptick in shop prices along with the central bank’s decision to leave inflation projections unchanged signals potential for an upside surprise.
Meanwhile the Australian, New Zealand and Canadian dollars sold off against the greenback. The RBA minutes showed a central bank ready to provide more stimulus, though its preference are bond purchases as it doesn’t see it reasonable to lower interest rates further. New Zealand reported stronger service sector activity, but with stocks selling off, NZD succumbed to profit-taking. Softer Canadian housing starts contributed to the slide in CAD, but if tomorrow’s consumer price report shows inflationary pressures exceeding expectations, we could see renewed gains in the loonie and weakness in USD/CAD.