US Dollar: Breakout!

On Friday we wrote, â�,��"The euro rally can be characterized by four simple words â�,�“ 5 percent and done. Yesterdayâ�,��"�s muted US CPI data convinced the market that the Fed will likely terminate its rate hike campaign at the 5% a level that has already been priced into the greenback. At the same time speculation that the ECB will target 3.5% as its ultimate tightening goal radically shifted market sentiment as traders began to adjust to the narrowing in the interest rate differential between the two currencies.â�,� Add to that the fact that US is now running nearly $1 Trillion Current Account deficit which is having difficulty being financed by ever more reluctant foreign investors and is it any wonder that dollar lost more that 200 basis points against the euro this week?

Our friend Michael Shedlock point to yet another ominous sign for the greenbackâ�,�“the Saudi stock market is down more that 30% in two weeks. Middle east investors, who have been some of the most ardent buyers of US assets with their petro-dollars, may be facing their own form of â�,��"Asian contagionâ�,� that swept Far East nations in the late 1990â�,��"�s. None of these developments bode well for the dollar as these same investors may be forced to liquidate some of their US holdings.  With little on the calendar next week to inspire dollar longs, the game as we noted last week, belongs to the euro bulls for the time being.

Euro: Anti-Dollar Momentum

Economic data was barely present on the EZ calendar this week with only the ZEW and Industrial Production numbers offering any marquee value. Despite the lackluster results, with ZEW slipping to 61.1 and IP remaining flat on a month over month basis, traders heartily bid up the unit as expectations of a more hawkish ECB and a more dovish Fed outweighed any shortfall in the economic releases.

Next week much like one that just passed offers very few significant data points for traders to consider. Furthermore, US data will contain strictly second tier items as well with LEI, housing data  and Durable Goods comprising the most interesting news flow. On the EZ side Trade Balance will take center stage with oil imports likely contributing to the gap. Overall the market remains  at the whimsy of comments by monetary authorities and any potential geopolitical flare ups that may occur. Having raced higher during last week, the EUR/USD may yet rally a but further on sheer momentum but will likely stall the critical 1.2300 figure where long term resistance resides.

Yen: Eking Out A Gain

You know it was a bad week for dollar bulls when even the yen managed to eke out a gain. The gains however, were paltry relative to euro with the yen only rising 56 basis points against the EUR/USD much more impressive 232 basis point rise. Ironically enough while the EZ data was lackluster but that currency was spurred by hawkish central bank talk, the Japanese data was rather robust, yet the yen was stymied by dovish commentary from a slew of fiscal and monetary officials who stated that the Zero Interest Rate Policy will stay in place for the foreseeable future. As Central Banks from Norway to Iceland to Switzerland to the Eurozone begin to pursue tightening policies, the BOJ remains the sole OECD nation with ultra low short term rates, making the yen the preferred funding vehicle for carry trades. This dynamic along with the fact that the 115.00 zone is the â�,��"maginot lineâ�,� for the always exchange rate sensitive Ministry of Finance will likely prevent any dramatic downward movement in the USD/JPY for the time being

Next week the Merchandise Trade Balance and the Tertiary Activity measure of Japanâ�,��"�s service sector provide the key event risk of USD/JPY traders. Both are expected to improve materially and if they print to expectation a test of the 115.00 zone  appears probable.

British Pound Recovers

Down one week, up the next. Fueled by an impressive recovery in the RICS housing survey which jumped to 17 from only 10 expected along with a decent rebound in Retail Sales which increased 0.5% vs. 0.4% projected, sterling rose 172 basis points this week recovering most of last weekâ�,��"�s drop. Not all news was cheery with unemployment rising far more than expected to 14.6K from 3K. The UK economy appears to be experiencing a soft landing which leaves the BOE on the sidelines for now - neither tightening nor loosening interest rates. The net effect is that the currency itself was pushed out of the limelight and while it gained value on the back of broad dollar weakness, the GBP continued to lose ground on the crosses with EUR/GBP rising to 6940, the first time it was within striking distance of the 7000 figure since the middle of last year.

Next week only the MPC minutes are likely to elicit any trader reaction. With the currency now approaching the 1.7600 - 1.7700 resistance zone only a renewed bout of dollar negativity will push it higher. It absence of that consolidation may well be the most probable scenario.

Respect the Swissie

As expected the SNB raised rates by 25 basis points to 1.25% this week but SNB President Roth remained coy about the pace of future rate hikes, stating only that it would pursue â�,��"gradual adjustmentâ�,�. The unit gained on the dollar but continued to lag the euro as questions of whether the SNB will match the ECB hike for hike remained in tradersâ�,��"� minds.
 
Next week, Industrial Production â�,�“ expected to jump 6.5% from the prior decline of â�,�“3.4% may further boost the expectations of Swissie bulls.  For the time being however, the dichotomy between the countryâ�,��"�s impressive growth record and its relatively dovish monetary posture, continues to weigh on the currency, especially in the EUR/CHF cross. However, should traders temper their expectations of ECB actions, the EUR/CHF cross may yet correct as the superior Swiss economic results will become the dominant trading theme.

Boris Schlossberg is a Senior Currency Strategist at FXCM.