Strong Retail Sales Spur Dollar, Inflation Next

US Dollar
The greenback went into Wednesday’s North American session constrained to modest ranges against most of its major pairings.  This changed just prior to the open of US capital markets in New York though when the Commerce Department released its retail sales report for November. With the wholesales equivalent reporting an unexpected 0.5 percent contraction in sales only two days prior, predictions for this market-moving indicator were cautious. This set the groundwork for an upset; and the unexpected 1.0 percent jump in sales for the month effectively triggered bullish momentum behind the dollar. In context, the rebound in consumer spending facilitated the biggest increase in sales since July, while the level excluding autos marked its own 10-month high on a 1.1 percent rise. Furthermore, from the various product groups, it was easy to discern that much of the improvement was on part of holiday sales. Sales of electronics goods, which have shown rather stable changes over the previous months, suddenly received a 4.6 percent boost in November. Now dollar traders will shift their attention to tomorrow’s import price index, which is the first of the trio of inflation gauges that will be released for the month. With energy prices leveling out last month and the Fed keeping its inflation warnings in place, the numbers will be closely watched.

Euro and Swiss Franc
Weakness was witnessed on the day for both Euroland currencies as economic data couldn’t lend a hand in combating better than expected US retail sales figures.  For the most part, economic data was widely in line with consensus expectations, keeping the currencies weaker in the New York session.  One thing, however, did keep the euro incrementally supported in the New York morning.  Despite being lower at the open, the euro was slightly supported by comments made by European Central Bank member Yves Mersch.  According to ECB member Mersch, current interest rates in the Eurozone remain low and supportive of economic growth in the economy, boosting speculation for higher rates in the near term.  Subsequently, confirming the aforementioned speculation was the fact that although the central bank will not commit to a straightened path of higher rates, Mersch did state that policy makers are aware of upside risks, namely rising inflationary pressures.  The sentiment supports further rate hikes in the near term as we head into year end with futures traders pricing in a full two rate hikes by the end of next year.  On the topic of rate increases, the market is expecting another rate hike by the Swiss National Bank in the overnight tomorrow as Chairman Roth continues to reflect concern of overall regional inflationary pressures.  With recent economic reports still supportive of an expanding economy and concern that prices at the consumer level are likely to be bolstered in the short term, policy makers are expected to opt for another 25 basis point round of tightening in tomorrow’s announcement.  The decision should give the Swiss franc some reprieve before the spate of US data expected for Friday.

British Pound
Broadly supportive of the pound sterling, unemployment in Europe’s second largest economy dropped by the most in almost two years as earnings and wage increases rose by the fastest pace in almost six years.  According to the Office for National Statistics the number of Britons claiming jobless benefits dropped by a whopping 5,700, helping the overall rate to decline to 4 percent on the year on year.  Now, coupled with yesterday’s rise in consumer prices, there seems to be plenty for Governor Mervyn King to pull at when considering further rate hikes in the near future, especially in the first quarter.  Traders are already pricing in a definitive rate hike of another 25 basis points in the repo rate by the first quarter of 2007 as the short sterling implieds have increased.  Subsequently, with the index of wage increases rising to the highest reading since December 2000, there was plenty of bidding in the session as the British pound vaulted higher in the overnight session to once again test the 1.9700 figure on positive momentum that economic data will continue to be boosted in yearend tallies.  The sentiment is especially concentrated on retail sales figures, which have steadily risen in recent months.  Ultimately, should the string continue, the market may very well see their well awaited retest of previous resistance, just short of the 1.9900 handle.

Japanese Yen
Price action ran counter economic data as figures were lending a bullish bias to the Japanese yen in the short term while the currency suffered under the US greenback.  Aside from industrial production that came in slightly above expectations at 1.6 percent for the month, the current account report lent some interim strength as the surplus widened for the fourth straight month.  For the month of October, demand for automobiles and domestic exports were spurred by a weaker yen, contributing to a lift of 5.2 percent to 1.51 trillion yen in the year on year.  What was even more surprising was the amount of income surplus the world’s second largest economy was sporting.  Supported by broader domestic investment in foreign assets, the income surplus climbed by a whopping 3 percent to 1.18 trillion yen compared to the previous year.  Higher rates of interest drove the growth in foreign income, which has coincidentally tripled since 2000.  Subsequently, the results are likely to play into the overnight’s release of the quarterly Tankan report, which is expected by the consensus to have improved on all measures in the fourth quarter.  With improvements in the survey, sentiment may shift towards a sooner than later rate hike by the Bank of Japan as central bankers rely heavily on the business survey in implementing sound monetary policy.  The report, additionally, coincides with the tertiary services report to be released simultaneously.  The report, a surveillance of services spending, is expected to reverse course from the month prior and rise by 1.2 percent as companies increased spending.

Commodity Currencies (CAD, AUD, NZD)
Fundamental action in the commodity bloc was rather staid with sparse economic calendars. The Australian dollar responded to an 11.8 percent jump in the volatile Westpac consumer confidence gauge. Some time later, the loonie was jolted by the weakest capacity utilization rate in three years with the third quarter print.  Weak foreign demand was recognized as the culprit for the weak read.