US Dollar Takes Bearish Turn Lower - US Retail Sales Could Impact Risk Trends on Thursday

US dollar price action was primarily responsible for much of what happened throughout the forex markets on Wednesday, as the DXY index finally broke below critical trendline support, suggesting the currency is officially turning lower. There was little in the way of fundamental news for the US, but that will change on Thursday as the Commerce Department is forecasted to report that US retail sales fell negative for the seventh time during the past eight months in February, as deteriorating labor markets, tight credit conditions, and a year-long recession weighs heavy on the minds of consumers. More specifically, advance retail sales are anticipated to have contracted 0.5 percent during the month, and excluding auto sales are expected to have slumped 0.2 percent, marking what may end up being a consistent trend through the first half of 2009. As we saw with US non-farm payrolls, the impact of a disappointing result may be mixed, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further. As a result, it will be important to gauge the impact of the news on DJIA or S&P 500 futures, as a sharp decline would signal flight-to-quality and US dollar strength, while gains would suggest a pickup in risk appetite and thus, US dollar weakness.

New Zealand Dollar Surges as RBNZ Signals End to Easing Cycle, Australian Dollar to Face Employment Data Overnight

The New Zealand dollar rallied at the end of the New York trading session after the Reserve Bank of New Zealand (RBNZ) cut their Official Cash Rate (OCR) as expected by 50 basis points to 3.00 percent. However, it was necessarily the rate decision that had the biggest impact on the currency. Instead, traders were more interested in RBNZ Governor Alan Bollard’s comments that interest rates were now at “very stimulatory” levels and that the central bank expects the “rapid easing of monetary policy to slow.” Furthermore, Bollard said that the RBNZ does not expect to see interest rates in the nation near-zero, suggesting that the end of the central bank’s rate cutting cycle is nearing. Bollard also noted that the RBNZ expected activity to trough mid-year, and then gradually pick up through the second half of 2009. Overall, the news adds to evidence that the commodity dollars are better positioned for a rebound from a fundamental perspective as growth in the New Zealand, Australian, and Canadian economies has not been hit as hard by the financial crisis as nations like the US and UK.

That said, the Australian labor markets started to deteriorate during the second half of 2008, and this is likely to continue through 2009. Indeed, the February unemployment rate is forecasted to rise to a nearly three-year high of 5.0 percent from 4.8 percent, while the net employment change is anticipated to fall by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 20:30 EDT.

Euro Rallies for Test of 1.2850, Swiss Franc at Risk Ahead of Expected SNB Rate Cut

Broad-based weakness in the US dollar contributed to strength for the euro and Swiss franc, but when it comes to EUR/CHF, there’s upside potential ahead of the Swiss National Bank’s next rate decision on Thursday at 9:00 ET. Indeed, EUR/CHF broke above intraday trendline resistance at 1.4750 on Wednesday morning, adding to downside risks for the Swissie since the SNB is expected to cut their 3-month Libor target rate down to a range of 0.0 percent - 0.50 percent from 0.0 percent - 1.00 percent. Looking at the fundamentals for the region, Q4 GDP contracted for the second straight quarter at a rate of 0.3 percent while February’s CPI numbers show that inflation is barely holding positive at an annual rate of 0.2 percent. The Swiss economy has taken a severe hit from waning demand for Swiss goods by the country’s European neighbors, as exports fell 8.1 percent in Q4. With this scenario unlikely to change anytime soon, the odds remain in favor of another rate cut by the SNB, but ultimately the news may not have a large impact on the Swiss franc because the change is so minimal and as interest rates fall lower, changes have less of an impact on the economy and financial markets. It is worth noting that the Swiss franc did tumble against most of its major counterparts when the SNB last cut rates in December, but gained against the greenback, so a repeat may not be out of the question.

British Pound Rebounds Despite Disappointing UK Trade Figures, Start of Quantitative Easing

The British pound staged a solid rebound as the greenback fell below critical support levels. However, UK news wasn’t necessarily supportive of the currency. First, the UK trade deficit widened to 7.745 billion pounds in January from 7.232 billion pounds in December as total exports fell 5.4 percent as measured by volume from the month prior. Much of the decline was due to waning demand from non-EU countries like the US, Switzerland, and China, as exports to the EU actually grew to 11.287 billion pounds from 10.663 billion. Meanwhile, the Bank of England launched its quantitative easing program in an effort to boost money supply in the UK. The start of the program was deemed as a success as the BOE received 10.5 billion pounds in offers to sell gilts, which was five times more than the central bank had wanted to buy. Ultimately, quantitative easing should bring down medium and long-term interest rates, which could weigh on the British pound.

Terri Belkas is a Currency Strategist at FXCM.