US Dollar, Japanese Yen Rebound as S&P 500 Gives Up Friday’s Gains

The US dollar and Japanese yen staged a comeback on Monday, though the yen was by far the strongest of the majors, as NZD/JPY and USD/JPY tumbled more than 1 percent while pairs like AUD/JPY and CAD/JPY plunged over 2 percent. Indeed, risk aversion dominated followed days of improved investor sentiment, as the S&P 500 ended the day down 2.15 percent and the DJIA finished down 1.82 percent. There was little in the way of hard economic data, but news that the Federal Reserve reduced the scale of capital requirements facing some of the nation's biggest banks sapped some of the optimism associated with the government’s official results released last Thursday. Indeed, after the tests were completed, there was reportedly two weeks of intense bargaining between government and bank officials, suggesting that the results may not genuinely reflect the financial situation of the 19 biggest financial institutions in the US.

However, tonight at 19:30 ET, Federal Reserve Chairman Ben Bernanke will speak on the topic, and regardless of the subject, his comments tend to be highly market-moving. As a result, words that reiterate the positive sentiment gleaned from the official report has the potential to provide yet another boost to risk appetite.

British Pound Remains a Laggard Ahead of UK Trade Data, Industrial Output

The British pound remained one of the weakest major currencies, gaining only against the ultra-weak Aussie and Canadian dollars, as the fundamental view of the UK remains highly bearish, after the Bank of England surprisingly announced an expansion of their quantitative easing (QE) program last Thursday. Indeed, the Monetary Policy Committee agreed to increase its purchases of government and corporate debt by 50 billion pounds to a total of125 billion pounds, suggesting the BOE believes that the economic outlook has worsened as the world economy remains in “deep recession.”

Upcoming UK economic data is likely to highlight the impact of slowing global trade on the nation. The UK Visible Trade Balance for the month of March is anticipated to rise slightly to -7.2 billion pounds from -7.315 billion pounds, but the results may continue to highlight the fact that waning Euro-zone demand has led exports to the region to take a hit. Likewise, industrial production is projected to have fallen 0.9 percent during March, dragging the annual rate of growth down to -12.8 percent. Practically every component of the index has dropped in recent months, including manufacturing, mining & quarrying, electricity, gas & water supply, and oil & gas. Overall, if the trade deficit widens or if industrial output falls more than anticipated, the British pound could fall lower. On the other hand, better-than-expected results could shine a much-needed light of optimism and provide a boost to the currency.

Euro Pulls Back Ahead of Euro-zone GDP Later in the Week

The euro backed down on Monday, as EUR/USD fell from 1.3665 and EUR/JPY slipped back toward the 200 SMA after breaking above the level on Friday. There was little in the way of economic news, but the euro could encounter some bearish data on Friday as Q1 GDP is forecasted to contract for the fourth straight quarter, this time at a rate of -2.0 percent, compared to -1.6 percent in Q4 2008, while the year-over-year rate could fall by a whopping 4.1 percent. Such data would indicate that the Euro-zone’s recession deepened into the start of 2009, and would only raise the odds that the European Central Bank will consider cutting rates further or will need to take more drastic steps than their current credit easing plan.

Canadian Dollar, Australian Dollar Tumble as Carry Trades Consolidate Gains

The Canadian dollar and Australian dollar were the weakest of the majors on Monday, as USD/CAD rebounded from support at the 38.2 percent fib of 0.9056 - 1.3015 at 1.1509 while AUD/USD reversed from Friday’s high of 0.7707 and RSI turned up from oversold/bought levels on both pairs. That said, it is not yet clear if the moves denote a consolidation of the large moves we saw last week or if they indicate a true reversal. Fundamentally, Canadian data has been strong, as we saw on Friday. The net employment change had been expected to fall by 50,000 during April, which would’ve marked the sixth straight month of job losses. However, the Canadian economy actually added on 35,900 jobs during the month, keeping the unemployment rate at 8.0 percent. The increase was due to a surge in self-employment, as positions rose by 37,000, but since these sorts of jobs are known to be relatively unstable, the news isn’t a reliable sign of recovery. Regardless, the economies associated with the commodity dollars – Canada, Australian, and New Zealand – have all fared the global economic slowdown much better than nations like the US, Euro-zone, and UK, making the Canadian dollar, Australian dollar, and New Zealand dollar attractive from a macroeconomic perspective.

Terri Belkas is a Currency Strategist at FXCM.