• Good Retail Sales Not Good Enough for Dollar Bulls
• British Pound Rallies for Fourth Straight Day Against Dollar
• Japanese Investors Slow Purchases of Foreign Investments

US Dollar
The markets have been very quiet today as everyone shifts to vacation mode.  Most exchanges around the world are closed for Good Friday with some in Europe closed for Easter Monday as well.  Unfortunately, the much awaited retails sale report was not surprising enough to cause any meaningful preholiday volatility.  After falling an upwardly revised 0.8 percent in February, sales rebounded by 0.6 percent in March.  Excluding automobiles, sales increased 0.4 percent.  It appears that the improving labor market is still fueling healthy spending habits by keeping consumers optimistic.  As long as this trend persists, the Federal Reserve has their argument for continuing to raise interest rates.  No matter how concerned we get about the housing market or the fact that oil prices are now less than 30 cents away from their all time highs, until we see a response by consumers to curb their spending substantially, the impact on growth will remain limited.  The University of Michigan released today survey indicates that confidence is holding steady.  However it would be surprising that if the current downtrend in the housing market and the uptrend in oil prices continue, that US consumers can actually continue to spend as voraciously as they have in the past.  Lost in the mix were reports that import prices fell more than expected last month while business inventories remained flat following a 0.6 percent drop in sales.  Even though markets are closed tomorrow, industrial production is scheduled for release.  Manufacturing activity has been floundering, which has prompted analysts to forecast a slower acceleration in activity last month.  We doubt that this will have much of an impact on the market in general.  The big mover of the day was actually the commodity currencies and in particular, the Aussie and Kiwi.  Traditionally, these two currencies have had a strong correlation, but over the past few months, the correlation has broken down significantly.  The Kiwi is bouncing thanks to last night's strong retail sales report while the Aussie is the day's biggest loser as gold prices fail to sustain its previous momentum. 

Euro
After the stronger US retail sales numbers, the Euro lost ground against the dollar and broke below the 1.20 level once again.  However, the same level has proven to be a strong region of support as the EUR/USD quietly recuperated all of its losses in the second half of the US session.  Economic data released this morning was actually Euro bearish with inflation growth slowing in France and the Italian trade balance widening more than expected.  This comes after slower inflation growth in Germany and what is expected to be slower growth in Italy as well.  Yet, with energy prices on the rise once again, it would not be surprising to see inflation creep higher in the months to come.  Politically, there have been no new developments out of Italy and we are expecting at least a few more weeks of uncertainty.  European markets are closed both Friday and Monday, so we do not expect any major news to push the EUR/USD out of its tight trading range. 

British Pound
For the fourth day in a row, the British pound is stronger against the US dollar.  After seeing stabilization in the housing sector and continued mergers and acquisition activity, there is more good news out of the UK today.  Department store chain John Lewis reported stronger sales this past week, while the BCC reported stronger export orders in the first quarter.  Overall, the BCC Quarterly economic survey was very positive, which should be encouraging for pound bulls.  Furthermore, the UK council workers have also canceled their plans to go on strike after successful negotiations with the government.  Yet, the manufacturing sector continues to be an area that we are very worried about.  For this reason, we expect the Bank of England to continue to leave monetary policy stimulative in order to turn the currently mixed numbers to broad based improvements. 

Japanese Yen
The Japanese Yen was little changed against the majors today.  According to the Ministry of Finance, purchases of foreign bonds by Japanese investors are below average while foreign purchases of Japanese investments continue to increase.  This can surely be attributed to the strength of the Japanese stock market as well as prospects for growing yield in Japanese debt instruments as well.  However, once again BoJ Governor Fukui threw cold water on speculation for a second quarter rate hike.  He said that he was concerned about the rise in long term yields and did not feel that it was in line with the BoJ's plans.  Meanwhile, it is important to mention that Japanese life insurers have been less willing to purchase foreign bonds and instead are opting for JGBs once their bonds come to maturity.  If this proves to be true, then it is yet another reason for global dollar demand to decline.  Worse yet, if some of Japan's largest companies are considering reducing their dollar denominated investments, the more important question to ask is if the Bank of Japan will do the same. We already talked about how China is using their money to purchase more tangible investments, and if Japan, the world's largest holder of US Treasuries also reduces their demand for dollar denominated investments, then we will have two traditionally big buyers with deep pockets dropping out the market.

Kathy Lien is the Chief Currency Strategist at FXCM.