US Consumer Confidence level plunged to 89 in April, and retail sales slumped by -0.3 Month-over-Month in March—signifying that the US consumer is under immense pressure. In addition, the GDP growth missed estimates for the second straight quarter, with the growth for the first quarter dropping to as low as 0.5 percent annualized.
Obviously, these developments will not influence the Federal Reserve to increase interest rates and it also leaves the greenback highly exposed to short selling. This is not the first time that the US dollar becomes weaker against its peers, shedding its value by some percentage points only to come back stronger as the economy of the United States regains momentum. Therefore, investors should be careful before shorting the greenback. Even after a series of lackluster data, the chances of a positive surprise in economic data is much greater. At this point in time, shorting the dollar after a 6.5 percent correction will be too late.
In order for the correction in the greenback to turn much wider and justify another short, credit growth and employment data should be in focus. As long as credit continues to grow, businesses eventually return to spending and growth will soon come back. Currently, credit is still growing.
On the other hand, as the levels of employment stay high, and the creation of jobs (nonfarm payrolls) is steady, then consumers will return to spending. When this happens, retail sales will rebound and the greenback will recover as well. However, if the nonfarm payrolls data grow by less than 100,000, the dollar will weaken. If two nonfarm payrolls miss marks, this signifies a larger trend and a deeper correction.
The US Dollar index is changing hands near 92-93 pivot zone. The April US Nonfarm Payrolls report is scheduled to be released next week. With this, there is a huge chance that the greenback will bounce right off its pivot level. If the Nonfarm Payrolls data miss by a huge margin—well below 200,000—it could indicate near term weakness and the dollar could drop by as much as 3 percent until it touches its next support.
Furthermore, if the Nonfarm Payrolls data turn to be downbeat, we expect an even larger correction. If the credit growth begins to stall, this is a clear sign of an even longer term correction.
For investors who are looking for a longer term dollar short, all conditions mentioned must be met. Shorting the greenback at this point is just too risky, and is definitely not recommended.