US Dollar Falls, But Finds Trendline Support

The US dollar ended the day mostly lower, gaining only against the Canadian dollar, as the currency remains in consolidation mode versus most of the majors. Looking to the DXY index, we see that the greenback has ended the week virtually unchanged as this morning’s plunge was ultimately supported by a rising trendline near 80 connecting the June 3 and June 11 lows. With resistance looming just above at 81.35, this period of tight range-bound trade leaves the currency susceptible to breakouts next week, especially since there will be quite a bit of event risk on hand from the US.

On Tuesday, the National Association of Realtors (NAR) is anticipated to report that existing home sales rose for the second straight month at a rate of 2.6 percent in May to an annual pace of 4.80 million from 4.68 million. While not always a reliable leading indicator, there are encouraging signs that existing home sales could improve in line with expectations, as the Commerce Department reported on June 16 that housing starts and building permits jumped from their record lows during May. On Wednesday morning, US durable goods orders are projected to show a 0.8 percent decline in May following a 1.9 percent jump in April, and excluding transportation the index is forecasted to fall 0.5 percent. Later in the day at 14:15 ET, the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent, and this should remain the case throughout much of the year. On Thursday, the third and final reading of US Q1 GDP is not expected to be revised from previous estimates of -5.7 percent, and thus, may not be too market-moving. Finally, on Friday, personal income and personal spending results for the month of May are anticipated to yield improvements, but traders should be skeptical of the income result: past increases have been purely the result of rising transfer payments, which include retirement, disability, and employment insurance, while wage and salary compensation has either fallen or stagnated since September 2008.

Euro, British Pound Consolidations Tighten – Levels to Watch for the Week Ahead

The euro and British pound didn’t see any major economic releases on Friday, and this will remain the case through much of next week. As a result, it makes it all the more important to keep technical considerations in mind, as well as US dollar trends. Indeed, pairs like EUR/USD and GBP/USD have spent a good amount of time consolidating, suggesting that breakouts for the pairs may be imminent. Levels to watch for EUR/USD include resistance at a falling trendline connecting the 6/3, 6/11, and the 6/19 highs at 1.4000, and support from a rising trendline connecting the 6/15, 6/18, and 6/19 lows near 1.3915. For GBP/USD, traders should keep an eye on a falling trendline connecting the 6/3, 6/11, and the 6/19 highs near 1.6545/50 and a rising trendline connecting the 5/18, 6/8, and 6/18 lows at 1.6258.

Canadian Dollar the Weakest of the Day as Retail Sales Disappoint, New Zealand to See GDP Data Next Week

The Canadian dollar ended Friday as the weakest of the majors after Statistics Canada said that retail sales tumbled 0.8 percent during April after rising throughout Q1. The drop was disappointing in light of expectations for a 0.1 percent increase, and a breakdown of the report shows broad declines in most of the components, including gas stations (-1.9 percent), furniture/electronics (-0.8 percent), food & beverage (-1.0 percent), pharmacies (-0.4 percent), and clothing (-0.6 percent). The news doesn't bode well for Q2 GDP results, as it suggests that consumption remains lackluster amidst mounting job losses, and adds to the Bank of Canada’s deflation concerns.

Meanwhile, the New Zealand dollar was rather strong, but those gains could prove short-lived next week as an upcoming GDP report is anticipated to show that the New Zealand economy contracted for the fifth straight quarter during Q1 at a rate of -0.7 percent, which could push the year-over-year rate down to match the Q4 1991 low of -2.3 percent. Indeed, the New Zealand economy has been hit hard as demand for exports has fallen, unemployment has climbed, and consumer spending has faltered. As it stand, Credit Suisse overnight index swaps are pricing in a 26 percent chance of a 25bp cut by the Reserve Bank of New Zealand (RBNZ) on July 29, but if New Zealand GDP falls more than expected, speculation of such a move could rise and weigh on the New Zealand dollar.

Japanese Yen Still Correlated to Risk Trends – Bearish Potential Remains for the JPY Crosses

The Japanese yen fell against most of the majors, but that was due primarily to gains in FX carry trades during the European trading session. Some of the JPY crosses have been moving in lockstep with US equities, as both the DJIA and EURJPY gained at the start of the US trading session and spent most of the day drifting lower. As we mentioned yesterdayrisk appetite still remains on edge and has not been helped by recent downgrades of the credit ratings of 18 US banks by S&P, especially as five of them were pushed into junk territory. S&P cited the notion that "[o]perating conditions for the industry will become less favorable than they were in the past, characterized by greater volatility in financial markets during credit cycles and tighter regulatory supervision.” On the other hand, 10 banks have returned $68 billion worth of TARP funds, including JPMorgan Chase and Goldman Sachs, indicating that not all is equal in the banking sector at this juncture.

Ultimately, it’s undoubtedly positive that some of the nation’s biggest banks are returning taxpayer funds, but according to a press release published by the FDIC on May 27, their "Problem List" of troubled banks grew during the first quarter “from 252 to 305 institutions, and total assets of problem institutions increased from $159 billion to $220 billion.” As a result, it’s important to keep the situation in perspective, as there are still significant downside risks to the health of the financial sector and the economy at large.

Terri Belkas is a Currency Strategist at FXCM.