Bernarke Buries the Dollar

â�,��"Bernarke buried the dollar yesterday with his dovish testimony in front of Congress, â�,��" we wrote on Friday. As many other analysts have already pointed out, Chairman Bernarkeâ�,��"�s premeditated use of the word â�,��"pauseâ�,� was enough to send dollar bears into a frenzy. With the market already nervous about dollarâ�,��"�s stability given the massive structural deficits of the United States, any suggestion that the rate hike cycle is coming to an end was enough to push the EUR/USD through the critical 1.2500 level. By the end of the day that number had reached the 1.2600 figure as lower than expected GDP, disappointing U of M numbers and a softer Chicago PMI all combined  to drive the dollar lower.

Yet with almost everyone in the FX market turning into a dollar bear, the trade may be becoming a tad too crowded. Last Friday night came out an announcement out of Citibank was that they took profits on their dollar short positions as they felt â�,��"compelled to lock in the impulsive profitability of this move and look again next week".

What could cause a retrace in this monster up move? Stronger  Personal Income data, a hefty NFP above 200K and oil below $70 could bring dollar bulls right back to the party. Next week could see some very active order flow.

The Rise of the Anti-Dollar

Same story different week.  The mixed economic data, most notable of which was the horrendous contraction in German Retail Sales which dropped -2.7% against an expectation of 0.4% gain,  did nor prevent the euro from scaling new yearly highs. The unit appreciated by 221 basis points against the buck as Bernarkeâ�,��"�s testimony and continued Central Bank diversification drove the trade flows.  Two weeks  ago it was Riksbank and last week the bank of Finland reported diversifying assets into euros. Though amounts were nominal in the context of $2 Trillion/day FX market, the psychological impact was vital to maintaining  the momentum of euro bulls.

While last week appeared to be an easy ride for euro longs, this week may be far more problematic. The marquee event on the calendar will be the ECB rate announcement on Thursday. The market does not anticipate a hike, but does expect a clear promise of a hike in June. However as we noted on Thursday, â�,��"Improving labor conditions are critical to Euro-zone growth, where the downtrodden consumers have been  reluctant to spend for more than 3 years. A robust job market will generate the confidence to increase spending and further fueling gains in GDP.  To that end, the rise of the euro , as weâ�,��"�ve noted in the past, may stand as a critical threat to a sustainable European recovery. At 1.2500 and above many of the European finance ministers are likely to escalate their rhetoric in an attempt to pressure the ECB to maintain a dovish monetary policy.  While recent statements from ECB officials have been relatively hawkish, should the currency appreciate much further, we believe European monetary policymakers may decide to refrain from tightening monetary policy  - a move that is likely to surprise the majority of  currency traders.â�,�

In With The Yuan, Out With Rates

Along with the rising sun, Japan can now enjoy and appreciating currency.  The ascending wedge that was arguably a year in the making finally broke on Monday when the G7 meeting wrapped up. The most market-significant theme discussed was a unified call for China to further loosen its managed float against the newly comprised basket of currencies.  The other topic of interest for currency markets â�,�“ short term  interest rates - seemed to take a hit with Thursdayâ�,��"�s slew of data.   Particularly troubling for those staking their claims on an imminent rate hike from the BoJ was the large 2.1% drop in overall household spending in March.  This comes despite a net 240,000 jobs added to the economy that has kept the unemployment rate steady at a seven-year low 4.1%.  While some ambitious yen longs have said a rate hike is just around the corner, policy officials are unlikely to even consider a change until it becomes  blatantly obvious that that inflation has returned.

Next weekâ�,��"�s calendar will be a truncated one for yen traders.  Running into the nationâ�,��"�s â�,��"Golden Weekâ�,�, the last three days will leave Japanese capital markets closed.  The one market-worthy indicator worth of note will be Mondayâ�,��"�s overtime earnings.  Once again, while overtime earnings could suggest inflationary pressures, it doesnâ�,��"�t necessarily mean Japanese consumers will put that increase in incomes back into the market.

Sterling, More Than A Rally

It was a good week in terms of economic data for the British Pound, and the currency markets reflected that fact â�,�“ albeit belatedly.  The first strong number to reach the market, but was oddly enough not a launching point for sterling bulls, was March retail sales.  Sales jumped 0.7% on the month lending support to speculation that consumer spending is rebounding.  The second positive item up for the week were GDP numbers that repeated the 4Q number on a quarterly basis, but which rose 2.2% from 1.8% on annualized one.  Again, nothing from sterling bulls.  The real move hit Thursday with a strong push through 1.7935 resistance that had been present since August of last year.  From peak to trough, the sessionâ�,��"�s run ranged a hearty 220 pips; however this wasnâ�,��"�t the wasnâ�,��"�t the end of the matter.  Rolling into Friday, expectations for a very strong follow through were low with only GFK consumer confidence on the radar, but the unit verticalized.  The sentiment measure beat expectations of a rise to a â�,�“6 by rising to a â�,�“4 read in April but the true reason for the rise was the continued dollar bearishness.

Next  week the UK economic calendar is packed.  With some countriesâ�,��"� dockets anemic from national holidays and other just empty following previously busy weeks, the UK carries the most event risk.  For the first half of the week, tradersâ�,��"� will concentrate on manufacturing, construction and retail trade.  A well rounded picture that encompasses most of the sectors of gross domestic output for the first month of the second quarter.  The real focus however lies with the BoE rate decision.  Though there is little doubt they will stick to 4.50% rates, recent data may change the overall tone of the MPC message.

Swissie Scores the Big One

We have been fans of the Swiss economy since the beginning of the  year as the country produced far better growth results than its much larger neighbor next door. Yet despite positive trade balances, ultra low unemployment statistics and a healthy 2% GDP growth rate,  the franc hasnâ�,��"�t gotten any respect in the currency market. The main culprit for Swissie relative weakness to the euro has been its laggard interest rate policy, with SNB being decidedly more dovish in its rhetoric than the ECB. As a result the EUR/CHF rose to above the 1.5800 hitting  yearly highs.

No more. On Friday the countryâ�,��"�s most important economic report â�,�“ the KOF index of leading economic indicators produced blowout numbers, printing at 2.03 versus market expectations of 1.32.  Additionally the SNB chief Jean Pierre Roth in a speech on Friday stated that â�,��"'The inflation forecast we published in March clearly indicates that the current interest rate level is incompatible with long-term price stability, Therefore, the bank will continue to implement the strategy of monetary normalization pursued since June 2004 because a preventive approach is much less painful for our economy than belated corrective measuresâ�,�.

That news send the Swissie soaring as it gained  286 basis points on the dollar for the week and pushed the EUR/CHF cross lower by nearly 150 points  in one day. Next week Thursdayâ�,��"�s inflation numbers will be key to further gains for the franc. Should they percolate, the SNB rate hike in June will be almost assured.

Boris Schlossberg is a Senior Currency Strategist at FXCM.