Retail Sales Battle vs Jobless Claims & Lehman

Stronger than expected increase in US retail sales diverges with escalating weekly jobless claims and news of embattled Lehman CFO & COO being ousted and a subsequent 9% decline in the company's shares may. US retail sales jumped 1.0% in May, twice greater than expectations, following a sharp upward revision in the April figure to 0.4% from -0.2%. Ex autos soared 1.2%, following 1.0%. Weekly jobless claims rose by 25K to 384K, reaching their highest level since the last week of March. Continued claims jumped by 58K to a fresh 4-year high (highest since February 2004). Fed funds futures are now pricing a 100% chance of a rate hike in Q4, with which we disagree.

Where to From Here?

We mentioned in yesterday's charts strategy piece “the dollar may post renewed gains in the event that Thursday's release of US retail sales shows the expected 0.5% increase in May following a 0.2% April decline... This would be especially conducive for fresh USD gains against GBP (1.9480), NZD (0.7480) and gold (855)”. Indeed, over the past 24 hours, GBP has tumbled from 1.9642 to 1.9460, NZD dropped from 0.7565 to 0.7492 and gold fell from 882.15 to 867.43 per ounce.

We now expect sterling losses to extend towards 1.9380, NZD towards 0.7460, and 0.7435.

Gold's declines may have to dissipate at $855, which is just above the 200 day moving average. But note that gold's technical set-up shows an ominous series of lower highs, which suggests ample likelihood for a retest of the 200-day MA. The last time gold traded below its 200-day MA was in August 20, 2007. The fact that it has been more than 10 months gold hasn't tested below such a vital technical landmark is testament to the metal's ascendance and an implicit loss of confidence in the dollar's general health. But the recent turn of events in favor of the US dollar primarily from the US central bank have maintained the metal's downward trajectory since March 17, which coincided with the multi-year lows in S&P500 and the Dow.

Our bearishness in equities is bolstered by yesterday's tumble to 2-month lows in the major equity indices, supporting our thesis that the market will fail to push higher in the midst of the Federal Reserve's explicit intentions to gradually remove its policy easing. Technicals are also set up to test 1,320 and 11,900 in the S&P500 and the Dow. Falling US stocks are expected to especially weigh on NZD and GBP against USD and JPY.

Euro Seen Stabilizing at 1.5360

Euro remains pressured near the lows after the US retail sales figures and their upward revisions are boosting the dollar across the board. Although the increased probability of an autumn Fed hike according to Fed funds futures is expected to bolster the greenback, we warn traders that positive US data have not always led to sharp losses in EUR. This time may be different, however, as these figures bolster the case made by the Fed that chances of a substantial decline in US growth have dissipated. The element of ECB July rate hike expectations is likely to help cement a bottom at the key support of 1.5360, followed by 1.5320. Upside capped at 1.5430, followed by 1.5470.

USDJPY Targets 200 day MA

The strong US retail sales data should be expected to help USDJPY breach above 108, but a key resistance is found at the 200-day MA of 108.35. The last time the pair traded below its 200-day MA was in late July 2007. Today's US figures may trigger another “bear market rally” in equities, but the news from Lehman could stand in the way of such upside. Thus, we could well see an early run-up in US stocks, before markets absorb the reality that strong retail sales mean increased chances of a Fed tightening, at a time when the labor market remains clearly eroded. 107.60, followed by 107.20.

Cable Drops 2 cents

Sterling loses more than two cents from yesterday's $1.9660s, largely on broadened USD gains. The Bank of England Quarterly Inflation Attitudes Survey showed a price increase of 4.3% over the next 12 Months from the 3.3% prior figure. Increased inflation only exacerbates the Bank of England's dilemma between stimulating growth and lower inflation, but we expect the central bank will be forced to focus on the former. We expect GBPUSD to retest the 1.9440 lows, followed by 1.9410. Prolonged declines towards 1.9380 and 1.9320 (as seen in yesterday's chart strategy) are noted. Resistance drops to 1.95.

Aussie Eyes Support 0.9270

Aussie extended its declines after the unemployment rate held steady at 4.3% and net new employment fell by 20K, shedding further drag on the Aussie. So far, the only positive element to the Aussie has been persistently high inflationary expectations justifying the high 7.25% interest rates. But with US and global stock deepening their losses and Australia 's economy showing further signs of weakness, the Aussie may be slated to reach 0.9270-75.

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Ashraf Laidi
CMC Markets Plc
http://www.cmcmarkets.com/usfx

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