US Dollar Ends Friday Modestly Lower as US Import Prices Fall By Record, Consumer Confidence Rises

The US dollar was the strongest currency when it came to the lowest yielding currencies, which now include the Swiss franc and Japanese yen, but the greenback fell versus the commodity dollar, euro, and British pound. This ultimately kept the DXY index below former trendline support, which suggests that the currency may continue to tip lower. In economic news, US import prices fell for the seventh straight month in February, pushing the annual rate of growth down to a record low of -12.8 percent. Indeed, the appreciation of the US dollar against the Canadian dollar drove import prices from Canada down 1.6 percent during the month and though petroleum import costs rose 3.9 percent in February, the annual rate remains negative by a whopping 52.4 percent. Meanwhile, the US trade deficit narrowed to $36 billion in January - the lowest level in six years - from $39.9 billion as oil and automobile imports fell.

However, it was news that the University of Michigan's consumer confidence index unexpectedly rose in March to 56.6 from 56.3 that provided a brief boost to risk appetite. Looking at a breakdown of the index, sentiment on current economic conditions turned increasingly pessimistic, while the outlook actually improved very slightly. Furthermore, inflation expectations for one-year ahead rose to 2.2 percent from 1.9 percent and expectations for five-years ahead slipped to 2.8 percent from 3.1 percent. Overall, the inflation expectations will be somewhat encouraging for the Federal Reserve as they suggest that the central bank has done a good job of signaling that medium and long-term price growth will remain around 2 percent, which is a common inflation target amongst many of the world's central banks.

Looking ahead, traders will need to watch for commentary from the weekend’s Group of 20 (G-20) meeting, especially given the titles of their three meeting sessions, including: The Macro-Financial Response: Short Term and Long Term, Reshaping the Global Financial System, and Role of the International Financial Institutions. All of these sessions as well as the final communiqué could yield remarks that will have an impact on risk trends, with more defined coordinated plans likely to provide a boost to risky assets (negative for the US dollar), while a lack of consensus and signs of division amongst the G-20 members has the potential to spur increased risk aversion (positive for the US dollar).

Japanese Yen Losses Continue to Pile Up Ahead of G-20 Meeting

The Japanese yen ended the past week off on a mixed note, as the currency gained versus the US dollar, British pound, and Swiss franc but fell against the Canadian dollar, euro, Australian dollar, and New Zealand dollar. While much of this had to do with the resurgence in risk appetite, as evidenced by the 9 percent rise in the Dow Jones Industrial Average from the March 6 close through the March 13 close, we also have to consider renewed prospects of currency intervention. This was brought back to the forefront by the Swiss National Bank, who said on March 12 that they would work to prevent any further appreciation of the Swiss franc against the euro.

The situation in Switzerland is very similar to that of Japan, as exporters have been hurt by the gains in their national currencies against the currencies of their biggest trading partners. For Japan, this refers specifically to China and the US, which are the top two importers of Japanese goods (according to the CIA World Factbook), as the Japanese yen has gained over 9 percent against both the Chinese yuan and US dollar over the past 6 months. Japanese officials have cited concerns about the yen’s appreciation in the past, but they have yet to move toward hard-lined verbal intervention, let alone physical intervention. With the G-20 meeting over the weekend, there is potential for discussion of currencies to occur, and if this is actually written into the final communiqué, the yen could pull back sharply.

However, that is not the only piece of event risk looming on the horizon for the Japanese yen. The Bank of Japan is expected to announce late on March 17 that they have left their target rate unchanged at 0.10 percent, but the release of the Bank’s monthly report at 01:00 ET on March 18 should provide more information on their view of economic conditions. Over the past few months, the BOJ’s report has reflected consistently worse economic assessments, and this may continue to be the case as the higher value of the Japanese yen takes a toll on the country’s export industry. Given the mounting speculation over the potential for Japanese currency intervention, there is also a risk that we could see such an announcement with this central bank meeting, which would likely drive the Japanese yen lower. However, if the markets ultimately find that neither the G-20 nor the BOJ even mention currencies, the Japanese yen could see a bit of a boost by the end of the next week.

Euro Consolidates Within Tight Range, Could Signal Breakouts Next Week

The euro spent much of Friday consolidating against the US dollar in a range of 1.2875 - 1.2935, as the early-morning release of Euro-zone retail sales didn’t have much of an impact on the currency. Retail sales rose less than projected in January at a rate of 0.1 percent, while the annual rate edged up to -2.2 percent from -2.4 percent, but since this is such a lagging indicator, it did little to change interest rate expectations. From a technical perspective, the tight consolidation of EUR/USD signals that the pair could breakout when trading resumes on Sunday, especially since the latest FXCM SSI data - a contrarian indicator - shows that traders remain net short the pair.

Looking ahead to Monday morning, Euro-zone CPI is forecasted to have risen in February for the first time since September at a rate of 0.4 percent, which could push the annual rate up to 1.2 percent from 1.1 percent. However, this is still far below the European Central Bank’s 2 percent target and as they’ve said in the past, short-term fluctuations will not have much impact on their plans for monetary policy going forward. Nevertheless, Credit Suisse overnight index swaps are still pricing in a 70 percent chance of a 25 basis point cut by the ECB during their next meeting, but if CPI rises much more than anticipated, there is a chance that the euro could pop higher upon the release.

Terri Belkas is a Currency Strategist at FXCM.