Tuesday, November 17, 2020

DXY may have room for limited upside in the short-term on lockdown risks and weaker-than-expected retail sales

  • Dollar
  • DXY


Analysts’ Pick:: DXY may have room for limited upside in the short-term on lockdown risks and weaker-than-expected retail sales

  • Headline retail sales data likely to face added downside pressure from seasonal adjustments after strong sales in September
  • Nonstore retail sales showing signs of normalising, signalling that headline data should start to reflect the same as well
  • Downside risks to the US economy is still present in the short-term thanks to lingering vaccine capability and distribution concerns 
  • Expect DXY’s overall decline in the medium-to-long-term to continue, but at a slower rate as upside in the index is likely present in the short-term as risks materialise

Retail sales data to unveil impact of uncertainty during the month prior to the US presidential elections. But with unfavourable seasonal adjustments and uncertainty during the month with regards to fiscal spending in the US, headline retail sales for October looks more likely to fall flat from September. Important to note is that September's strong reading was also a result of distorted seasonal spending, which saw recreational and back-to-school categories rising more than usual. That momentum in our view is expected to slow moving forward, as most households exhaust their access savings that were derived from increased stay-at-home activity and one-offs stimulus checks from the government.

The effects of stimulus cheques and increased savings due to earlier lockdown measures is starting fade and consumer spending is likely to reflect this as well


Seasonally, the month of October is usually a strong month for retail spending, due in part to the ramp up in incentives for spending in preparation for incoming holiday months. What this means is that while we may see an increase in non-seasonal adjusted figures, adjusted figures will suffer from distortions especially since September was a surprisingly strong month likely thanks to parts of the US economy continuing the reopening process from earlier lockdowns. Additionally, while September saw sales from non-store retailers increase 0.46% MoM, growth in that space remains mostly flat (3-month simple average at 0.35% growth), signalling that e-commerce sales is likely to continue easing moving forward and remain close to flat month-to-month.

Non-store retail sales is starting to normalise after a non-usual surge following stay-at-home-orders


Weakness in both average gasoline prices and auto sales during October is likely to put pressure on headline retail sales as well but only to a small extent. Auto sales only inched 0.8% during October and is unlikely to greatly impact the headline data set. Gas prices declined approximately 2% during the month but seasonal factors should already cover the impact of gas prices since the winter season tends to see slower motorway traffic. Hence we forecast headline retail sales to fall flat during October, closer to +0.1% as compared to economists' forecast of 0.6%. We will be looking at the details of the report, as well as Walmart's quarterly earnings report later today for what to expect from the upcoming holiday season this year as the pandemic is likely to impact the usual dynamics of consumer spending.

A slight dip in auto sales and a decline in gas prices in line with seasonal changes is likely to result in minimal impact on headline retail sales


The dollar as a result, may show some strength on the release of the report, but we do expect this impact to be minimal as a result of the pandemic. As before, vaccine developments and potential lockdown restriction announcements are more likely to have a heavier impact on the dollar. Per our morning brief today (November 17th), Moderna's most recent interim data from its phase three trials helped support optimism in the market, as it helped to emphasis the narrative that the vaccine, along with large amounts of fiscal monetary stimulus will help to boost stocks in the coming year. But the short-term impact of lockdowns - now with the addition of California enforcing its strictest lockdown measures on 94% of its population - may be mispriced in the market as more hospitals come under pressure and force a lockdown across states regardless of whether officials support such restrictive measures. Hence, we expect some upside pressure on the dollar thanks to downside risks to the US economy starting to increasingly materialise over the short-term. However, noting the longer-term impacts of a vaccine (assuming that concerns such as manufacturing and distributions time horizons and vaccine capabilities gets addressed), the greenback should face limited upside in the overall medium-to-long-term trend. We see the Dollar Index inching back towards 93.07's level, and possibly break that resistance closer towards 93.90. We expect gains to mostly be limited at the 94.15 Fibonacci retracement and continue on the downward trend that it currently is in in the medium-to-long-term.

Technical Analysis:


DXY continues to trend in an overall bearish trend. Technical indicators are more skewed towards a sell signal, with MACD falling into a bearish trend while the RSI continues to have room to fall. If momentum follows, we may see the index fall closer to 92.13’s level as bears try to retest the support. A key support level for traders will be 91.87, which is the 23.6% Fibonacci retracement level. Weak fundamentals suggest that we may not see DXY break that level in the short-term however, as downside risk from potential lockdowns in the US materialise despite vaccine developments being generally positive. Important to note is that vaccines, while bullish, is still a few months away, which means that risks in the short-term could potentially slow the greenback’s downward cycle.

Support: 92.13 / 91.87 / 91.00

Resistance:  93.07 / 93.90 / 94.71

DXY Chart (H4)