US Dollar: The End of Cheap Money

You could only love the price action in EUR/USD this week if you were a masochist. The week started by trapping all the euro longs who fell for the false breakout at the 1.2150 level as the pair quickly turned right back to the 1.2000 figure off the firm US PPI figures that had traders thinking Fed might move to 5.25% rates before pausing. The dollar bulls received yet another push higher when Thursdayâ�,��"�s Existing Home Sales figures jumped an unexpected 5.2% higher leading everyone to conclude that the US consumer demand remained robust. But as we noted on Friday, â�,��"Existing Home Sales are a notorious lagging indicator with yesterdayâ�,��"�s numbers really representing Januaryâ�,��"�s transactions when unseasonably warm temperatures may have skewed the results. Today New Home Sales report, though far smaller in volume, may be a more accurate indicator of current housing demand. â�,��" Sure enough New Home Sales plunged 10.5% and now it was the dollar longs turn to scramble as the pair bulldozed its way back to 1.2045 by end of Fridayâ�,��"�s trade taking out all those freshly minted stops along the way. In short the data last week reflected the basic fact that housing prices cannot rise exponentially in an environment of higher real interest rates. The Calculated Risk blog posted a very interesting chart that showed a decline in Home Sales preceding every one of post WWII US recessions by approximately 6 months. For long term dollar bulls this is something to ponder.

Euro: Prove Its Worth

The Eurozone data didnâ�,��"�t exactly set the currency world on fire last week as nearly every report save for the mild uptick in French consumer spending bled red, missing expectations sometimes significantly. Rhetoric from EZ monetary officials continued to be hawkish but it was partly offset by cries from various EU Finance Ministers who demanded a pause to tightening for fear of chocking off the very fragile EZ recovery. In midst of this malaise traders had to deal with escalating protests in France against new labor laws and the uncertainty of always unpredictable and possibly volatile elections in Italy on April 9th. All in all hardly a recipe for unabashed euro bullishness and indeed the unit only gained when dollar bearish news swept the market.

Next week however setups a real battle of wills as both currencies see major economic news flow including FOMC announcement and Personal Income reports in the US and the IFO survey and German unemployment in EZ.  The net result may well be another week of whipsaw action as surprises from one region are then offset by news from the other. Buckle ups boys as Betty Davis once said. Itâ�,��"�s going to be a bumpy ride.

Yen: One-Two Step

We started our Thursday Asia market comments with the following observation, â�,��"USD/JPY executed the familiar one-two step of bullish economic news, followed by bearish rhetoric from monetary officials. Japanese Merchandise Trade Balance posted a slightly smaller surplus than expected but both imports and exports recorded the largest gains in 9 years indicating that Japanese economy is firing on all cylinders. Nevertheless, yen bulls were stymied after BOJ member Nakahara noted that deflation still persisted and he saw no need to abandon the ZIRP standard anytime soon. In short it appears as though yen bulls will be thwarted  in any attempt to take the pair lower until monetary policy begins to echo Japanâ�,��"�s decidedly firmer economic results.â�,�

This tension is likely to persist into next week, as Japanese politicians continue to resist what is evidently becoming the end of deflation in the worldâ�,��"�s second largest economy. Next week the key event for yen traders will be the Tokyo CPI numbers which should show the sixth consecutive month of flat or positive increases in prices.

British Pound Contained

After months of speculation, this is the week that cable becomes negative carry to the dollar, assuming that the Fed raises rates 25bp as the market expects. With  that reality looming over the unit, any rally in sterling has been relatively contained. Last week the UK news was slow prompting the pair to trade primarily off the US event risk. The pound lost ground against the greenback for four straight days dropping to a low of 1.7307 before finally staging one of its famous 150 point rallies on Friday in the wake of the poor US New Home Sales data. Overall,however, it remained in a well defined 7200-7600 range.

Next week again is relatively paltry on the economic front with only Current account and Distributive Trades report to catch traders attention. One possible market moving release could come at the end of the week with the reporting of the GFK consumer confidence numbers. If they surprise to the downside pound weakness could accelerate.

Rates Hurt the Swissie

In the enigma that is the FX market, the country with some of the best economic performance in the world continued to see weakness in its currency as the franc declined the most against the greenback, dropping 156bp for the week. Industrial Production jumped 6.9% on year over year basis and import prices inched higher, gaining 0.3% for the month, but no matter. The franc continued to lose ground against both euro and the dollar as interest rate expectations weighed heavy on the unit.

Next week promises to be busy for the Swissie as the Swiss calendar  contains Retail Sales, UBS Consumption Indicator and most important of all the KOF leading economic indicator index. If the data proves once again to be positive, traders will be hard pressed to continue ignoring the good news and Swissie may finally begin to firm.

Boris Schlossberg is a Senior Currency Strategist at FXCM.