US Dollar Spikes Lower, US Retail Sales Makes Rebound Possible on Friday

The US dollar was generally mixed versus the majors on Thursday - until the afternoon, that is - as the DXY index ran into major resistance at 88.00. Volatility remains very high, as the CBOE’s VIX index traded in a 10 point range during the day above 60. Though this is down from the October 24 record of 89.53, it is historically high as the index rarely broke above 40 prior to this year’s financial market turmoil. Focusing on Thursday afternoon’s price action, the greenback fell sharply across the majors, something that Quantitative Analyst David Rodriguez happened to point out potential for in his look at forex speculative sentiment this morning. There was no fundamental trigger to the move, but with the financial markets less liquid these days, technical retracements can be sharp and severe. Other notable moves included a surge in US stocks, as the DJIA ended the day up 6.67 percent and more than 800 points higher than the afternoon lows. Looking ahead to Friday, volatility should remain high as the release of US Advance Retail Sales is expected to show that the index fell for the fourth month in a row in October, with consensus forecasts by Bloomberg News calling for a 2.1 percent decline. According to the latest report from the International Council of Shopping Centers (ICSC), sales actually contracted 0.9 percent in October from a year earlier, marking the first negative result since March 2008 and the worst reading since April 2007. A breakdown of the report shows that apparel and department store sales both fell roughly 11 percent from a year earlier while the luxury component tumbled 19.2 percent. Even discount and wholesale clubs sales slowed to a significantly weaker pace, suggesting that consumers are cutting back severely on spending across the board. Clearly, there’s quite a bit of downside risk for this particular Advance Retail Sales release, with disappointing readings likely to lead the US dollar lower for at least a brief time, though if risk trends remain in play, flight-to-safety could actually lead the “safe haven” currency higher.

Euro Tests 1.24, Then Jumps 400+ Points as German GDP Reflects Worst Recession Since 1996

It was a volatile day of trading for the euro, as the currency slumped throughout the morning to test support at 1.2400 following the release of disappointing German GDP numbers, only to rocket roughly 200 points higher between 14:30 ET and 15:00 ET. Focusing on the GDP news, Europe’s largest economy contracted 0.5 percent during Q3, and given the 0.4 percent drop in GDP during Q2, the news indicated that Germany was in the midst of its worst recession since 1996. This also raises the risks that Friday’s Euro-zone GDP figures will reflect the first recession for the region since the inception of the euro. Over the past year, the release of Euro-zone CPI drew significant attention and sparked major volatility for the euro. However, indicators of growth have become more important as of late, as the European Central Bank has shifted its focus away from inflation and on to the global and regional economic slowdown. As a result, when both Euro-zone Q3 GDP and Euro-zone CPI for the month of October hit the wires at 5:00 ET, the former may get a bit more attention. Why? This will be the advanced reading of Q3 GDP and is forecasted to slump 0.2 percent from the previous quarter and as the second consecutive period of contraction, would fit the popular definition of recession (being two consecutive quarters of negative growth). Such data would only raise the odds that the European Central Bank will move to cut rates again at their next meeting on December 4, and if CPI drops in line with or more than forecasts to 3.2 percent from 3.6 percent, the news will only add insult to injury and could trigger sharp losses for the euro.

British Pound Experiences Heavy Volatility, May Still Face Downside Risks

The British pound traded within a nearly 400 point trading range on Thursday, tumbling to test support at 1.46 before rebounding toward 1.49. There was no UK data on hand for the day, but instead, we’re seeing that volatility remains high and leaves the major currencies prone to exceptionally choppy price action. This makes trading in current conditions very difficult, but one thing is clear: the British pound still looks bearish and these recent moves may simply have formed a bull trap. On Wednesday, the Bank of England forecasted that the UK economy will contract through 2009 and CPI will fall “well below” the government's 2 percent target and could even fall negative, signaling deflation. Now, Credit Suisse overnight index swaps have shifted to fully price in a 50bp rate cut by the BOE during their next meeting on December 4, but this could shift even further in coming weeks. With lingering risk aversion and bearish interest rate expectations unlikely to fade anytime soon, GBP/USD could easily return to the recent lows of 1.4557.

Japanese Yen Plummets as DJIA Ends Day Up 6.67%

On Wednesday we said that due to the inverse correlation between the Japanese yen and the DJIA, the low-yielding Japanese yen could surge even higher if the DJIA broke below the recent lows and the psychologically important 8,000 level. However, the DJIA managed to rebound more than 800 points following a test of 8,000 and ultimately ended the day up 6.67 percent at 8,835.25. As a result, the Japanese yen gave up its morning gains to plunge across the majors, finishing Thursday down roughly 3 percent against the greenback, almost 5 percent versus the euro, and a whopping 6.8 percent against the Australian dollar. Looking at the Japanese yen crosses, most of them stopped at intraday resistance, suggesting some potential for a pullback overnight. However, if the US stock markets lead to significant gains for Asian equities overnight, the yen crosses could easily break through those levels.

Terri Belkas is a Currency Strategist at FXCM.