With today's data on retail sales, broadly over expectations, we got an interesting fight going in the US Dollar crosses, namely versus the Euro (FXE) and Australian Dollar (FXA). This happened because the data was arguably both bullish, and bearish, for the dollar. Let me explain why.
The bullish thesis
As economic data, such as today's retail sales or recent jobless claims, comes in stronger than expected, the drive towards quantitative easing loses strength. The lack of quantitative easing means the Dollar won't be diluted which is obviously a positive - especially if this happens in a market that had been discounting near-term quantitative easing (word has it that such move could be signaled at the Jackson Hole gathering).
Additionally, strong economic data is usually a positive to the economy and currency showing it, which is another plus for the Dollar. I would however give this angle less weight, because such strength is usually predicated on the likelihood of seeing higher interest rates.
The bearish thesis
Interestingly enough, strong economic data in the U.S. sometimes drives the dollar lower versus other currencies. The reason is that the "risk on" which ensues usually includes buying other currencies such as the Euro. Also, the S&P (SPY) has a strong correlation with some currencies, such as the Australian Dollar, so when the S&P goes up some machines might well be tempted to buy into Australian Dollars.
All in all, rising markets have been associated with dollar weakness for a few years now, so it's always hard for the decoupling of a strong dollar and rising markets to happen.
The Australian Dollar can also be weak because of specific problems. China is undergoing a large transition which implies somewhat slower demand for the commodities Australia exports, and this is having a strong impact on everything from iron ore to copper to met coal. Such impact has been ongoing even in the face of higher stock markets, so the Australian Dollar has started to take notice in the last few days, that all isn't well.
The strong economic data does not offer an obvious forex trade, but it might be possible to bet against the Australian Dollar, specifically, and have this data not derail the trade as it usually would do in a "risk on" environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I am short AUD/USD