Will It Be a Good Week for the US Dollar?
No news can be good news for the currency market and this certainly seems to be the case for the US dollar which has rallied on little economic data. Consumer credit was the only number released and it came out slightly weaker than expected, which should have been dollar negative, but consumer credit almost never moves markets. Instead, the dollar is rallying because risk aversion is subsiding. This shift in sentiment is confirmed by the rebound that we are also seeing in the Australian and New Zealand dollars. The hope that equity market deal flow is returning with Discover Financial Services snapping up Diners Club and financing becoming more readily available as Washington Mutual receives a $5 billion cash infusion from investors has helped to restore some confidence in the financial markets. Whether this is enough to offset the deterioration in the labor market remains to be seen, but at least for the time being, hope is driving the US dollar higher. With non-farm payrolls behind us, no economic data poses a major threat to the US dollar this week, which is why it could continue to recover. Pending home sales and the FOMC minutes will be released tomorrow, but a weak housing market and the 75bp rate cut by the Fed is almost old news at this point. Since the March 18 monetary policy meeting, the equity markets have stabilized and credit markets have eased, which means that for the time being, the Fed’s efforts have worked in preventing far more serious consequences for the US economy and financial system had they let Bear Stearns go bankrupt.

What Is ECB Officials Saying Ahead of the Central Bank Meeting?
The Euro is slightly weaker against the US dollar today despite stronger economic data. German industrial production increased 0.4 percent in the month of February, offsetting the 0.5 percent drop in factory orders. Increased construction activity has helped production rise for the third consecutive month. Investor confidence has also improved with the Sentix survey increasing to 4.15 in April from 0.4 in March. Economic data is mixed ahead of the European Central Bank meeting, which gives the ECB the flexibility to either acknowledge slower growth now or continue to ignore it. According to this morning’s comments from ECB Bini Smaghi and Bonello, the central bank Governor may opt for the latter. Bini Smaghi reminded the markets that price stability is a top priority while Bonello indicated that economic fundamentals in the Eurozone are still sound. The ECB meeting is the biggest event risk this week and we may not see much action in the EUR/USD before the monetary policy meeting. Meanwhile the Swiss franc has barely reacted to the employment report which improved slightly on a non seasonally adjusted basis. This may be partly due to the fact that the central bank governor for Switzerland was on the wires this morning talking down inflationary pressures. He indicated that the strength of the franc against the US dollar should keep prices in check. The SNB is widely expected to cut interest rates later this year.

British Pound Slips on Housing Market Concerns
The British pound continues to be weighed by housing market concerns. Although Halifax, the nation’s largest mortgage lender has yet to reject new mortgage applications, they have started to preference customers willing to put down a larger deposit on home loans. More specifically, they are offering a lower interest rate to people who can make a down payment of 25% or more on their home and hiking the rates for people who borrow more than 75%. This will reduce the ability of UK citizens to finance the purchase of new homes, which would exacerbate the problems in the housing market and slow any eventual recovery. Meanwhile the Bank of England is the only central bank expected to alter interest rates this week. If consumer confidence also proves to be weak, this will build the case for a 25bp rate cut.

Australian and New Zealand Dollars Extend Gains, Canadian Dollar Retreats Further
US Dollar continued its loss against the New Zealand dollar and Australian Dollar, but gained momentum against the Canadian Dollar, with the kiwi reporting the biggest gain against the greenback. Although, no data was released for New Zealand, its gain can be attributed to an overall improvement in risk appetite. The Australian dollar on the other hand rallied despite weaker economic data. The trade balance was much wider than expected, led by a sharp drop in exports while construction sector PMI fell into contractionary levels. The Canadian dollar extended its losses as building permits slipped for the fourth consecutive month, marking the worst bout of releases since 1990. This suggests similar weakness in tomorrow’s housing starts report. The once invincible economy, which boasted of remaining strong in spite of its neighbor’s loss, is now under pressure as the US slowdown is slowly spilling into the economy.

Japanese Data Improves But Has Limited Impact on the Yen
Japanese economic data is beginning to improve, but this is having a minimal impact of the Japanese Yen. Leading indicators rose from 36.4 percent to 50 percent and we expect this strength to pass over to the Eco Watchers Survey, which is due for release this evening. Labor cash earnings have been on the rise, which should help to boost consumer confidence. Meanwhile the Japanese government is coming closer to announcing a new Bank of Japan Governor. The latest nominee is Shirakawa, the current acting Governor. There is a decent chance that he will be approved by the Liberal Democratic Party and the Democratic Party of Japan. In the past Shirakawa has been seen as a hawk on monetary policy, but economic conditions have changed significantly and as a result, it is not clear whether he will be willing to cut interest rates.

Kathy Lien is the Chief Currency Strategist at FXCM.