In a mostly quiet pre-weekend session, sterling jumped more than a cent in response to news of a shockingly strong retail sales increase of 2.6%. The consensus was for less than 0.5%. On a year-over-year basis, the 5.3% increase is the best nearly a decade.
There had been some concern that the UK economic momentum was fading, but today's report, even if a bit of a statistical quirk, an outlier as it were, it revives ideas that the BOE will be forced to hike rates sooner than its forward guidance suggests.
Since the end of last year, the implied yield on the Dec '14 short sterling contract fell about 20 bp. With today's action, nearly half of that has been recouped. Sterling itself had made new lows for the week earlier in the session just above $1.6300. It quickly recovered to almost $1.6460 before traders could catch their breath.
The large UK retailers were pessimistic and the data showed good reason for this. On a non-seasonally adjusted basis, sales at the large stores rose 2.6%. Consumers seemed to prefer the small stores. Those sales were up 8.1% on a year-over-year basis. Internet sales accounted for 11.8% of all UK retail sales in December, up from 10.9% in December 2012.
The dollar-bloc currencies remain under pressure. The Australian dollar is the weakest of the majors this week, losing about 2.2% against the US dollar; its poorest weekly performance in almost six months. Today it remains pinned to the three-year low recorded yesterday in response to the dismal employment report. Just as the market feel more confident that the Federal Reserve will continue to taper, it has become more confident of an RBA rate cut in the period ahead.
Today, though the New Zealand dollar is eclipsing the Australian dollar; dropping nearly 1%. There does not seem to be a macro trigger. The market is pricing in almost a 50% chance of a rate hike at the end of the month, more than double the chance seen a couple of months ago. The market had gone a long way toward pricing in three hikes this year. The move today seems largely an issue of positioning and speculative sales in the face of the losses suffered by the Aussie and Canadian dollars. We also note that the Aussie-Kiwi cross neared the 1.05 level, which has served as a bottom since 1995, with two brief violations. This appears to have also spurred some position adjustment today.
The euro is a bit softer against the dollar, weighed down by cross rate losses against the sterling. French President Hollande is quoted saying that the euro is "particularly high" and Airbus has made a similar comment. The market is accustomed to French officials being the first, or among the first, to complain about the euro's strength. Still, in terms of the escalation ladder, these kind of comments are fairly innocuous. Moreover, Hollande quickly added he will not comment further on the exchange rate. Except for some brief exception on Tuesday, the euro has spent the entire week within last Friday's ranges.
The dollar is trading quietly against the yen. The Japanese government upgraded is assessment of the economy for the first time in four months. An adviser to Prime Minister Abe opined that the dollar could rise to JPY115 this year. It has been unusual for a Japanese official to talk about specific exchange levels since the early days of Abe's government a year ago. Over the past week, net-net the dollar-yen is little changed. This is because the break below JPY103 was quickly recouped as dollar buying on pullbacks continues to be the path of least resistance.
Meanwhile, pending the North American session, the Nikkei could be the only major bourse to finish lower this week. It shed almost 1%. Separately, the MOF weekly flows show that Japanese investors sold foreign bonds for the second week. The JPY740.6 bln of sales follows JPY441.2 bln of sales the previous week. For their part, foreign investors sold JPY219.1 bln Japanese shares, and JPY743.3 bln of Japanese bonds. However, it terms of flows, this was easily offset by the JPY2.7 trillion of money market instruments bought.
Today's North American data is exclusively from the US. December housing starts, permits and industrial production will be reported. The risk is for soft data. Housing starts will likely to have been depressed by the weather and some correction to the 22.7% jump in November. The weather's impact on industrial output may be mitigated by increased utility output. On the other hand, the January preliminary University of Michigan consumer confidence report may tick up as the overall economy appears to have improved.