Dollar selling continued this week, but the pair had a hard time clearing the 1.5850 resistance level on the way to challenging the 1.5900 all time highs. Perhaps the bears are starting to run out of steam. Certainly the economic data gave them little to chew on this week. Overall the results were mixed as housing data and personal income showed some mild improvement but Durable Goods once again missed to the downside. At best one could say that the US fundamentals have not become dramatically worse and that was enough to keep dollar bears at bay.

Can Dollar Hold Ground?
Dollar selling continued this week, but the pair had a hard time clearing the 1.5850 resistance level on the way to challenging the 1.5900 all time highs. Perhaps the bears are starting to run out of steam. Certainly the economic data gave them little to chew on this week. Overall the results were mixed as housing data and personal income showed some mild improvement but Durable Goods once again missed to the downside. At best one could say that the US fundamentals have not become dramatically worse and that was enough to keep dollar bears at bay.

The pair remains at standstill as traders look for new themes to develop. Last week we noted that “With EURUSD having run out of stream at 1.5900 early last week, near term momentum has shifted to dollar bulls. They will however, need further negative surprises out of the Eurozone in order push the pair lower. Otherwise, assuming there are no additional exogenous shocks, the currency market may simply meander aimlessly for the rest of the week in very narrow trading range.”

The range for the time being appears to be contained within 1.5600-1.5850 zone. However, next week the veneer of calm may be shattered by the event risk to come. The US calendar carries important releases nearly every day of the week with both ISM Manufacturing and Services possibly foreshadowing the state of the US labor market to be revealed in Friday’s NFPs. If data confirms the doomsayers worst predictions showing continuing contraction in US labor demand, the dollar may not be able to hold its ground and 1.6000 could give way. On the other hand if the numbers do not reveal a huge decline of –100k or more, the greenback may inch away from precipice and commence a much needed relief rally.

Euro – Weakness Underneath?
On Friday we wrote that, “The EURUSD received a boost from more hawkish comments from Axel Webber who emphasized the price pressures in EZ were alarmingly high suggesting that the ECB will not consider any easing in the foreseeable future. Nevertheless, the latest data from Retail PMI readings revealed that consumer demand in the 17 member union may be starting to slow down significantly. The Retail PMI report slipped below the 50 boom/bust level for the second time this year, led lower by a sharp drop in Italian numbers which registered their worst reading since the survey began.

Italy remains the weakest link amongst the top 3 EZ economies and if the situation there deteriorates further political tensions in the region could begin to undermine euro seemingly relentless rise as the interests of Italy, Spain and other southern European members could come in conflict with those of France and Germany where growth continues at a healthy pace.”

Last week EURUSD strength was driven by the surprisingly strong IFO numbers and Industrial Production data which indicated that at least for the moment the economy in the 17 member region continues to operate at a healthy pace irrespective of the troubles in US. Next week the EZ calendar is considerably more low key with German Retail Sales and employment data the only two releases to interest the market. Ultimately however, trade in the pair will depend on the outcome of US economic news. With EURUSD running into serious resistance at 1.5900 only further deterioration in US economic condition is likely to push it beyond that figure.

BOJ’s Tankan Survey Likely to Reflect Dismal Business Conditions
For the second consecutive week, the USD/JPY pair closed out Friday’s NY trading session just below the 100 mark. Likewise, the US equity indexes went little changed over the course of the week as the financial markets generally shook off the pronounced risk aversion that has thrived as of late. However, the price action appears to reflect more of a consolidation of losses rather than a true stabilization, as the downside risks to the credit markets loom large and additional actions by many global central banks will still be needed in the coming weeks and months. Looking at Japanese-specific data, the economic picture appears mixed. Indeed, Japanese annual inflation hit a 10-year high of 1.0 percent in February, however, this was primarily the result of surging energy and food prices as the annual rate excluding these factors actually fell 0.1 percent. Meanwhile, the unemployment rate edged up to 3.9 percent in February while household spending was flat from a year earlier, as a deterioration in the labor markets hurts consumer confidence and spending. Overall, the Japanese data suggests that the Bank of Japan has all the more reason to consider cutting rates as an economic slowdown and global credit crunch takes its toll and adds to the downside risks to financial market stability.

Looking ahead to next week, the recent consolidation of USD/JPY within an ascending triangle creates the potential for a breakout. Upcoming economy data isn’t likely to bode well for Japanese growth, as Industrial Proudction is anticipated to fall 2.0 percent from the month prior while the Bank of Japan’s Tankan survey is forecast to reflect much of the same sentiment as the Business Sentiment Index (released last week). Indeed, the BSI reading for large manufacturers tumbled to -12.9 from 5.2, suggesting the Tankan reading for the same sector could reflect a sharp drop as well. With exporters feeling the pain of a stronger Japanese yen along with tepid demand amidst a global economic slowdown, the outlook for Japanese businesses is not bright by any means. As a result, another round of disappointing Japanese data will raise the risks that the Bank of Japan will cut rates, and with interest rates already at an ultra-low 0.50 percent, the news will do little to support a bid tone for the yen from an interest-rate-differential perspective. On the other hand, if risk aversion starts to dominate price action once again, USD/JPY could retreat to the 96 level.

GBP/USD Downside Risks Prevail as UK is Vulnerable to Credit Crunch
While the British pound started last week on a strong note, signs that economic conditions are turning ugly in the UK weighed on the GBP/USD pair. Indeed, house price growth – as measured by both Rightmove and Nationwide Building Society – slowed more than expected and only added to speculation that UK’s economic situation is eerily reminiscent of the US. Bank of England Monetary Policy Committee Member David Blanchflower has argued this point on many occasions, and is one of the primary reasons why he has consistently proven to be the most dovish member on the MPC. Unfortunately for the BoE, Blanchflower may be right. On Thursday, Nationwide raised rates on new mortgages in order to prevent the lender from becoming ‘overly competitive.’ Given the increased risks in the UK housing market, it’s not entirely surprisingly or uncommon to see a mortgage lender raise rates. However, the move is indicative of a greater issue: a credit crunch. UK banks do not want to lend, despite the BoE’s efforts to boost liquidity and cuts to the overnight lending rate to 5.25 percent. This is similar to the issues that the US is facing, and with global financial institutions seeking to reduce risk, a few rate cuts by various central banks is highly unlikely to convince them to lend aggressively once again. Regardless, the BoE is widely anticipated to follow the lead of the Federal Reserve and reduce rates in the near-term, especially after BoE Governor Mervyn King agreed in a parliamentary committee hearing that tighter lending conditions left the central bank predisposed to do so.

Looking ahead to this week, there are substantial downside risks for GBP/USD from a fundamental perspective, as PMI Manufacturing, PMI Services, Mortgage Approvals, and Housing Equity Withdrawals are all expected to reflect some slowing. Overall, it is clear that domestic demand is waning as businesses and consumers alike are hesitant to spend, which will continue to impact manufacturers and firms in the services sector. Meanwhile, the efforts of banks to quell mortgage demand by raising rates and enacting more stringent lending standards will probably be highlighted in the mortgage approvals.

Swiss Franc Finishes Week as Top Performer on Risk Sentiment
The Swiss Franc rallied strongly off of multi-week lows and finished as one of the top currency market gainers on a clear deterioration in risk sentiment. Fairly consistent declines across global equity markets forced traders to pull back exposure to the low-yielding CHF, but domestic economic developments were a mixed bag by comparison. The closely-watched UBS Consumption Indicator printed significantly higher through the month of February and offset fears of a Swiss economic slowdown. Yet not all was cheery for the Franc; subsequent KOF Swiss Leading Indicator suggested that growth is indeed decelerating through 2008. Markets are unsure of what to expect from the future of domestic expansion, but it remains relatively clear that broader financial market turmoil boosts demand for the safe-haven Swiss currency. All else remaining equal, the CHF may continue its rally against higher-yielding counterparts on a consistent deterioration in global risk sentiment.

The coming week will see significant event risk for the Swiss Franc and broader financial markets, and medium-term outlook for the USDCHF may very well weigh on two key US and Swiss economic reports. On the US side, Friday will bring the always-report US Non Farm Payrolls report for the month of March. Earlier that morning, Swiss officials will release results for key Consumer Price Index data. Given overall market skittishness and extreme sensitivity to US economic developments, the NFP’s report is clearly the most highly-anticipated piece of event risk for all USD-linked currency pairs. As such, outlook for the dollar and general financial markets may very well depend on whether or not the US economy continued to lose jobs through the month of March. Yet we cannot ignore the Swiss CPI’s market-moving potential across CHF pairs. Given overall indecision surrounding the future of Swiss National Bank interest rates, markets will likely react to any strong surprises in the inflation results.

Will The Canadian Dollar Catch The US’s Subprime Flu?
USDCAD passed the past week in a relatively tight 100-point range – giving a good feeling for the general state of the Canadian dollar itself. For the past four months, the pair has solidified a broad range between 1.0375 and 0.9700. Without historical price action for reference, such a range would be considered huge. However, this congestion is a pittance when compared to distance the Canadian dollar has traversed in its steady rally from 2002. This leaves USDCAD traders at a crossroads in deciding whether the pair has already put in a genuine reversal or a necessary period of consolidation is passing before the long-term trend can pick back up. Ultimately, this decision will be based by fundamentals and not technicals. In the past few months, any signs of developing momentum have been quickly absorbed by well capitalized range traders. What the market seems to be waiting for is data that either confirms or denies speculation that the Canadian economy will eventually show a dramatic cooling in growth that follows from the slowdown in the US, and that the BoC is heading into a period of aggressive easing that will rival the Fed’s.

This past week’s economic calendar certainly hasn’t tipped the scales in either direction. The only indicator to cross the otherwise barren wires was the usually market moving retail sales report for the month of January. For market surprising, the indicator fell flat by printing a headline reading at 1.5 percent that was only slightly above expectations. Traders seemed to be little impressed by the fact that the improvement was the biggest in eight months and the ex-autos indicator was significantly stronger than expected. From a broad fundamental perspective, this report shows that the Canadian consumer still stands as the backbone of growth and should sustain growth as exports start to fail. However, consumers’ support of the economy could easily falter should employment turn like it has recently in the US.

This week’s economic listings could have a more profound effect on the long-term outlook for the Canadian dollar, and therefore could potentially determine a direction for USDCAD. Monday brings a pivotal indicator for fundamental traders. the January GDP report will follow December’s 0.7 percent drop – the first contraction in 15 months and the biggest in over four years. Expectations are for a significant 0.5 percent rebound, but a second contraction would stoke fears that Canada is heading into an extended contraction. The next round of important fundamental data come until Friday. The volatile mix of the Ivey business sentiment survey and employment change number for March will almost certainly generate volatility. As suggested above, employment has been the fuel for consumer spending. Should there be an abrupt turn to layoffs, the outlook for growth and the Canadian dollar will dim very quickly.

Aussie Dollar Marks Sharp Rally, But Are Record Highs In The Past?
After witnessing a sharp breakdown in the Aussie’s consistent advance on March 20th, it seemed as if the bulls had finally relinquished their rein over the currency market. However, last week’s rebound suggests the market isn’t ready to give up on a currency backed by a 7.25 percent benchmark yield, a stubbornly hawkish central bank and one of the strongest economies in the G10. This fundamental appeal was certainly played up through the commentary made by central bank. The Reserve Bank of Australia issued a Financial Stability Review in light of the global credit crisis and the bank failures the problem has born. The policy group stated that while confidence in the global financial system is brittle, the Australia system was coping with the market disruption far better than most of its major counterparts. In a separate speech delivered by RBA Governor Glen Stevens, the policy maker went on to confirm that Australian banks were profitable, hold sound capital reserves and have little direct exposure to the US subprime problem. To further assure the market that the RBA wouldn’t be a late responder should domestic financial conditions sour, the Governor said the RBA stood ready to offer liquidity to the market and banks should it be needed. All of these promises are essential to the Aussie dollar as the currency is heavily dependent on the security of its yield.

Outside of the central bank’s jawboning, the currency was running on fundamental fumes. The only notable indicator scheduled for release was the January Conference Board Leading Index. And, the composite indicator - used to forecast growth over the coming three to six months - delivered a considerable surprise when it printed its first contraction in six months owing to contractions in stocks and housing applications – gauges of investment and tolerance for Australia’s high lending rates. Outside of the docket, the currency was receiving steady support from its commodity interests with prices for the energy, industrial metal and agricultural groups all holding strong.

Discerning the fundamental drivers for the week ahead, risk trends will almost certainly play a dominant role in Aussie dollar price action – despite the RBA’s attempt to dismiss the country’s exposure to global credit problems. What’s more, with the low yielders in the market driving to new highs, it may only be a matter of time before either AUDUSD or the low yielders snap their streak. However, when all is calm on the risk front, an active economic docket could have a big impact on price action. Top tier indicators on tap are the RBA rate decision and retail sales report. Less likely movers will be the HIA home sales number and AiG service and manufacturing activity reports. A question mark should be the RBA Governor’s testimony to Parliament, which could touch upon key concerns for Aussie traders.

Flight From Risk And Commodity Fire Sale Drive Kiwi Down
A prominent commodity bloc member and top yielder among the G10, the New Zealand dollar had two volatile market dynamics working against it last week. Technically, the kiwi marked a sharp 2.6 percent drop against the benchmark US dollar last week that happened to form a very defined double top just below 0.8215 and subsequently put the bottom in for a very volatile range. Looking back over this dramatic price action, it was clear that there were greater fundamental influences at work than a mere reaction to the few economic releases that crossed the wires. With an 8.25 percent yield, the carry trade favorite was a direct target when news of the Bear Stearns’ bailout triggered a withdrawal from risky assets. And, despite an attempted rebound after the FOMC’s rate cut, traders and investors finished the week by de-leveraging and squaring their books of potentially overbought assets. What’s more, for the kiwi which has a strong correlation to commodities, a sharp pull back in agricultural, metals and energy prices leveraged the sell-off in the typically stable NZDUSD.

Outside the broad reach of risk sentiment, there was a notable scheduled release that will no doubt have an influence on the fundamental health of the currency and monetary policy further down the line. The performance of service index from Business NZ reported an unexpected rebound from a multi-month low thanks to improvements in sales, new orders and employment. This is a significant counterpoint to a struggling factory sector; and this growth component may in turn help to sustain employment and growth through these globally difficult times.

Looking out over the days ahead, the kiwi dollar is almost guaranteed volatility. First and foremost, the currency will yield to any unexpected shifts in risk sentiment. The pair is less three hundred points away from a post-float record high and essentially stuck in neutral thanks to the broad technical range price action has formed; so a surprise can be a catalyst for serious price action. And, if risk trends are mute, a fully stocked economic docket will provide the market with fundamental fodder. The beginning of the week will offer a read on the consumer with credit card spending for February and consumer confidence through the first quarter. From there, the top market-moving current account balance and GDP numbers for the fourth quarter will define the economic outlook and RBNZ policy for the months ahead.

Boris Schlossberg is a Senior Currency Strategist at FXCM.