Dumping Dollars

â�,��"Reserve diversification by central banks,â�,� we wrote on Friday,â�,� has been a key driver of dollar weakness this year and this news (the move by the Swedish Central Bank to euros) further serves to reinforce the notion that the greenback may be under more structural pressure going forward."  For the past two weeks the story in the dollar has been to minimize the positive and accentuate the negative and this week was no different. Despite the fact that the TICS data printed at $86 Billion - far above the -$67 Billion Trade deficit â�,�“ the market focused instead on a slew of potentially dollar negative possibilities- the slowing housing market, the likelihood of Fed stopping at 5% and the more pronounced trend of Central bank diversification towards the euro. The later may become a very serious problem for dollar bulls, especially if US rates cap at 5% and Central Banks cease investing into US financials assets.

Next week some of these dollar bull fears may be assuaged if New Home Sales report a pick up and if the 1st Quarter annualized GDP prints a whopping 5% in comparison against only 1.7% growth last quarter. Although the market anticipates a strong number, the reality of such impressive results in the face of high rates and high oil prices may provide dollar bulls with some much needed respite from the relentless selling over the past few weeks.

Euro Bouncing Right Back

The euro bolted out of the gate last Sunday night in Asia and never looked back gaining 190 basis points on the week against the greenback and setting a yearly high in the process. Euro-zone economic data was decidedly second tier with only German wholesale prices and French consumption heading the calendar. Both printed above expectations but euro strength was driven by two USD factors â�,�“ the speculation that Fed was â�,��"five and doneâ�,� and indications that Central Banks were diversifying into the euro.

Next week Eurozone data will assume a much more prominent role especially at the front of the week as German Retail Sales and  IFO Business survey both come out on Monday and Tuesday. There is a strong possibility that the data may disappoint relative to last period numbers, especially  in the case of IFO which printed a 6-year high last month at 105.4. Whether the euro gets dented by this news remains to be seen. The unit has been able to shrug far worse news over the past few weeks, but as prices approach the serious resistance of the 1.2400-1.2500 zone the possibility of a correction grows stronger.

2% JGB?

On Thursday we wrote,â�,� yen bulls will now have to look  to the rise in the yield of 10 year Japanese Government Bonds above the psychologically important 2% level as a possible trigger for yen strength. At 2% or above many of the Japanese institutional investors including life insurance companies are likely to repatriate investment funds from abroad which would strengthen the currencyâ�,�  On Friday BOJ Governor Fukui was decidedly more laissez faire in his comments with respect to the jump in the yields of long term bonds noting that  â�,��"the general trend [in long-term rates] is reflecting Japan's economic recovery and rising stock pricesâ�,�. Governor Fukui statement suggested that while the Central bank may not abandon ZIRP anytime soon, neither will it attempt to talk down the recent spike in long term rates. 

Next week all key Japanese reports are scheduled for Thursday with the FX market focusing on CPI, Household spending and unemployment numbers. Should the data print to the upside, the yen will likely strengthen if not against the greenback then certainly on the crosses. As we go to press that is indeed happening as the G-7 communiqu�ƒ© focused on pressuring yuan revaluation, which in turn is boosting demand for yen

Pound Against the Flow

â�,��"Counter-intuitiveâ�,� could be the phrase to best summarize much of the action in the pound last week.  Though much of the United Kingdom was closed to observe the Easter holiday, cable saw plenty of activity as a break of the 1.7600 level sparked a massive 175-pip rally.  Even the mixed housing data the following day couldnâ�,��"�t dampen the run.  While the Rightmove housing price index edged higher from the previous month, the RICS data was noticeably more pessimistic.  The real catalyst for bullish cable traders was the hawkish tone of the BoE minutes, which suggested that the Central Bank was more worried about upside, rather than downside risks. The only pause in the strong bullish move occurred on  Thursdayâ�,��"�s when dour inflation figures, contradicted  much of what the MPC message just 24 hours prior.

With the imposing 1.76-resistance level out of the way, it will be interesting to see of the pound can sustain its run. Retail sales and lending figures will either confirm or refute the MPC hawkishness  GDP is on board with a forecasted 0.6%, the same pace as the final three months last year.  And finally, the GfK consumer confidence number for April is expected  to close out the week on a better note.  Overall, however, it is difficult to see how the unit can push above the 1.8000 level without additional dose of dollar bearishness.

Swiss Conditions Dim

For the first time in a month Swiss data failed to exceed prior months results. However, like most of the majors, the Swissie rallied for the against the greenback reaching a two-and-a-half month high.  But  Wednesdayâ�,��"�s Producer and Import prices report took the starch out of the franc bulls. Price growth for foreign and domestically produced goods eased to 0.1% in the March against expectations of a figure that would match the previous monthâ�,��"�s 0.3% number.  This was the second disappointing piece of data after April 4thâ�,��"�s release of the 0.1% drop in inflation, also for March.  Weak data continued on Thursday with a massive deceleration in retail sales. 

This weekâ�,��"�s Swiss calendar contains key clues to future demand. March trade numbers will be expected to print  tad lower but still produce an ample surplus while  UBS consumption indicator should shed better light  on the retail numbers from last week. Finally, the KOF leading indicator index expected once again set a yearly high. Should it meet projections, the KOF will confirm that the Swiss economic engine is operating smoothly, forcing traders to ask once again when will the SNB hike next?

Boris Schlossberg is a Senior Currency Strategist at FXCM.