US Dollar, Japanese Yen End on Mixed Note - Price Action May Be Quiet on Friday Due to Market Holiday

The US dollar and Japanese yen ended Thursday on a mixed note, as a market-wide increase in risk appetite only worked to the benefit of the commodity dollars and assets like stocks, with the DJIA ending the day up 3.14 percent at its highs. US economic data, however, was broadly disappointing. While the US trade deficit did narrow to $25.965 billion in February from $36.204 billion, it was due primarily to the continued contraction in imports, which fell 5.1 percent during the month and signals waning domestic demand. Exports rose 1.6 percent during the same period, thanks to an 11.6 percent increase in consumer goods shipments and an 8.5 percent rise in automotive shipments.

Meanwhile, the US import price index rose 0.5 percent in March, which was the first increase in eight months as petroleum costs jumped 10.5 percent during the survey period. However, most other components of the index remained negative and excluding these volatile petroleum costs, import prices were down 0.7 percent and the overall annualized rate reached a fresh record low of -14.9 percent.

Next, initial jobless claims fell by 20,000 during the week ending April 4 to 654,000, but remain dangerously close to the record highs of 674,000 reached last week. Likewise, continuing claims jumped by 95,000 during the week ending March 28 to another record high of 5,840,000, suggesting that the ascent of the US unemployment rate is unlikely to abate anytime soon, which is exactly what the Federal Open Market Committee (FOMC) indicated in the release of the March meeting minutes yesterday.

Finally, the International Council of Shopping Centers (ICSC) reported that chain store sales tumbled a greater-than-expected 2.1 percent in March from a year ago, which denoted the sixth straight month of contraction. A breakdown of the index shows that department store sales (which include luxury good sales) led the decline, while only drug store and wholesale club sales excluding fuel registered increases, suggesting that the only purchases that consumers are making are for necessities, rather than for discretionary items.

Looking ahead to Friday, many markets will be closed for the Good Friday holiday which should lead to lower liquidity in the forex markets. There are two scenarios that we're likely to see: either very quiet, range-bound price action or extremely choppy price action. Traders should keep this in mind, especially if they are maintaining tight stops on open positions.

British Pound Consolidates as BOE Leaves Rates Unchanged, Will Continue QE Efforts

The British pound has remained contained to a tight range versus the US dollar of 1.4600-1.4750, as the Bank of England left the Bank Rate at a record low of 0.50 percent, as expected, which marked the first “no change” decision since September 2008. The BOE Monetary Policy Committee’s (MPC) statement was short and sweet, providing little in the way of new information. The MPC did indicate that they would continue with the quantitative easing efforts announced on March 5, but that it would take another two months before the program was completed because they had only purchased 26 billion pounds in assets of the planned total of 75 billion pounds. Ultimately, there are still significant downside risks for the UK’s economy and financial system, but as it stands, the markets are broadly anticipating that the BOE will continue to leave the Bank Rate at 0.50 percent throughout the remainder of the year, since further reductions are unlikely to have much of an impact. In the near-term, it may be worth looking for a GBP/USD break out of its recent range, but of risk aversion returns, the pair’s break could be a bearish one.

Euro the Weakest of the Majors as ECB’s Monthly Bulletin Points to Deflation Risks

The euro was the weakest of the majors as evidence continues to point to another rate cut by the European Central Bank (ECB) and a move toward quantitative easing. On Tuesday we saw that the final reading of Q4 GDP was unexpectedly revised to a new record low of -1.6 percent from -1.5 percent, and heard ECB Governing Council member George Provopoulos say during an interview that the bank’s benchmark rate could be cut by at least another 25 basis points, as he did not “see 1 percent as a threshold,” and that he would “not exclude that the ECB could go down further from this level if the economic environment deteriorates further.” On Wednesday Fitch announced that they had downgraded Ireland’s sovereign credit rating to AA+ from AAA, and issued a negative outlook. On Thursday the ECB’s monthly bulletin highlighted their concerns about growth both domestically and abroad, as well as the potential for inflation figures to fall negative mid-year. While they noted that short-term changes in price pressures would not impact the central bank’s monetary policy decisions, it is hard to believe that the prospect of deflation is not disconcerting to many of the ECB’s voting members. By Thursday’s close, Credit Suisse overnight index swaps were now pricing in a 21.5 percent chance of a 25 basis point cut to 1.00 percent during the ECB’s next meeting, but there is plenty of time for market expectations to shift ahead of that May 7 meeting.

Commodity Dollars Dominate as ‘Risky’ Assets Rally Across the Board

The Australian dollar, New Zealand dollar, and Canadian dollar were easily the strongest of the major currencies on Thursday due to increased risk appetite, rather than fundamental forces. In fact, economic releases from Australia and Canada were disappointing, as the Australia’s employment change fell by a greater-than-expected 34,700 in March, pushing the unemployment rate up to a five-year high of 5.7 percent, while the Canadian employment change plunged by 61,300 during the same period, bringing the unemployment rate up to match the December 2001/January 2002 high of 8.00 percent. None of this stopped the Aussie and Loonie from testing their monthly highs against the US dollar, but traders should be sure to watch for either a break above or drop lower in the near-term.

Terri Belkas is a Currency Strategist at FXCM.