US Dollar Index Holds Below Key Resistance, Signals Further Declines

US dollar fell against nearly every major currency with the exception of the Japanese yen and Swiss franc, as the DXY index held below critical former trendline support, suggesting the currency has officially made a bearish turn lower. US Advance Retail Sales fell less than expected by 0.1 percent in February, and excluding autos the results were downright optimistic as the index jumped 0.7 percent. A breakdown of the report showed that sales of motor vehicles, building materials, food, and beverages all fell while spending increased on furniture, electronics, health/personal care items, gasoline stations, clothing, and sporting goods. On the other hand, jobless claims rose more than expected, with initial claims up 654,000 during the week ending March 7 while continuing claims hit a new record of 5,317,000 during the week ending February 28. Ultimately, signs of climbing unemployment do not bode well for spending trends in the US, but since the latest retail reports have been a bit better than expected it looks like there is a chance that personal consumption could actually provide a small boost to Q1 GDP.

Looking ahead to Friday’s US-based event risk, low oil prices could help lead the trade deficit to narrow slightly to $38 billion from $39.9 billion while the annual rate of import price growth could plunge to a new record low of -13.5 percent. Meanwhile, the University of Michigan consumer confidence index is projected to fall to 55.0 from 56.3, which would mark the lowest level since May 1980. Since none of these indicators are top-tier market-movers, traders may be able to expect that risk trends will remain in the driver’s seat.

Swiss Franc, Japanese Yen Plunge as SNB Announces Currency Intervention - BOJ Could Follow Suit

The Swiss franc plummeted across the majors on Thursday morning after the Swiss National Bank (SNB) announced their expected rate cut and surprisingly revealed plans to intervene in the currency markets. The SNB reduced their 3-month Libor target range by 25 basis points down to 0.0 percent - 0.75 percent with the goal of getting the rate down towards the bottom of the range at “approximately 0.25 percent.” However, the bigger market-mover was the SNB’s statement that they would “purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro” and also said that they would “purchase Swiss franc bonds issued by private sector borrowers in order to bring about a relaxation of conditions on the capital markets.” As we mentioned yesterday, EUR/CHF broke above intraday trendline resistance at 1.4750 on Wednesday morning, and based on the fact that the SNB will likely continue working to prevent the Swissie from appreciating, a test of the 200 SMA at 1.5516 seems probable.

It is also worth considering that the SNB’s announcement may have opened the door to potential for the Bank of Japan to intervene as well. Like the SNB, the BOJ has previously noted the negative implications of the appreciation of the Japanese yen, as the higher value hurts demand for exports in the trade-dependent economies. This is part of the reason why the Japanese yen was the second-weakest of the major currencies, falling roughly 1 percent against the Australian dollar, Canadian dollar, British pound, and euro. One of the other factors behind the drop in the yen was the surge in risk appetite, as commodities rocketed higher with oil up over 10 percent while the Dow Jones Industrial Average rallied 3.46 percent to close above resistance at 7,000. These moves may signal further strength for traditional “risky” assets like stocks and forex carry trades, and as a result, additional declines for the Japanese yen.

Euro Gains Despite Record Drop in German Industrial Output

The euro gained against the greenback on Thursday despite dismal economic data from Germany. Indeed, German industrial output plunged 7.5 percent in January - the most since record-keeping began in 1978 - which also brought the annual rate down to a record low of -19.3 percent. The declines suggest that the export-dependent economy is feeling the impact of the recessions that their biggest trade partners are experiencing in the rest of the Euro-zone, the UK, and the US. On Friday, data is forecasted to show that retail sales in the Euro-zone rose a slight 0.2 percent in January, though the annual rate of growth is anticipated to drop to -2.3 percent from -1.5 percent. Based on Germany’s retail sales report from the same period though, Friday’s results could actually be worse than expected. As the Euro-zone’s biggest economy, Germany’s economic data can sometimes serve as a good leading indicator, and their latest retail figures show that spending unexpectedly fell 0.6 percent in January while the annual rate plunged to -1.3 percent from 0.4 percent. Disappointing Euro-zone results could have a negative impact on the euro in the short-term, though this does not tend to be a huge market-mover for the currency much beyond the release time.

Canadian Dollar Rises Against US Dollar as Oil Surges More Than 10% - Watch Employment Report on Friday

The Canadian dollar gained against the US dollar on Thursday as oil prices surged more than 10 percent to close at nearly $47/bbl on indications that OPEC will move to cut production quotas yet again. However, where USD/CAD goes on Friday may hinge upon a highly market-moving report on Friday. At 7:00 ET, data is expected to show that the Canadian net employment change fell by 55,000 during February after plunging a record 129,000 in January alone. Furthermore, the unemployment rate is anticipated to have risen to match the nearly five-year high of 7.4 percent from 7.2 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

Terri Belkas is a Currency Strategist at FXCM.