Dollar Bulls Feel the Pain

Weak retail sales and a dovish Beige Book sent the US dollar reeling Wednesday in one of the first genuine signs that the crowded USD trade is beginning to clear out. USD lagged all its counterparts badly on the day while the kiwi gained a whopping 2.2% in a reversal from Asia-Pacific trading. The Australian jobs report is up next.

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Retail sales rose 0.1% in September compared to 0.2% expected but the details of the report were more downtrodden. Market participants focus on sales excluding autos, gas and building materials – also known as the control group – it fell 0.1% compared to +0.3% expected and the prior was revised to +0.2% from +0.4%.

Soft US economic data has reached the point where it's no longer a one-off. A series of releases have missed expectations and that will drive home the risk for the Fed and US dollar bulls. Many analysts long underestimated the headwinds from a strong US dollar, global slowdown and tighter financial conditions because of hawkish Fed rhetoric.  In Ashraf's latest Premium trades, after EURUSD long was closed on Tuesday for 180-pip gain, the position was reopened at 1.1410. Shorts in USDJPY and both DAX positions are well in the  green, while GBPCAD and GBPJPY are at a loss and EURCAD is just below B.E. point.  

The US economy is still plodding along but it's looking like another year of growth around 2%, rather than the 3% the Fed expected to see. The US dollar was down at least 0.8% against every G10 currency Wednesday and selling accelerated after the Beige Book which cited modest growth, subdued wages and headwinds from the dollar. The implied Fed hike odds for December are now down to 27.1%.

The news was less important than the market moves as the US dollar was belted especially badly against GBP and NZD. Another one to watch is USD/JPY as it touched 118.59, which was below the post-NFP spike but just above the Sept low of 118.54 and support that extends to 118.44. The pair has been in a relatively narrow range for the past seven weeks and a breakout could be long lasting.

But the immediate focus is on the Australian dollar as it turned higher and has now gained in 11 of 12 sessions. Talk of RBA rate cuts circulated yesterday after Westpac rose its mortgage rates. That talk will gain traction if the employment report at 0030 GMT is weak. The consensus is for 9.6K new jobs and unemployment flat at 6.2%. Watch the full/part-time breakdown.