Dollar Stalemate Continues
On one of the quietest calendar weeks in memory, the trade in the EURUSD was dominated by extraneous factors. At the beginning of the week the greenback weakened off carry trade flows into the EURJPY, then gained some ground after softer than expected data from the Euro-zone caused some selling in the pair, only to finally weaken once again when Jean Claude Trichet chaired a surprisingly hawkish ECB press conference on Thursday. Overall however, as we noted on Friday, “For now markets appear to be at a stalemate.”

Next week the action should become much more interesting albeit not until Wednesday when US economic data of note will begin to hit the tape. US Retail Sales will be the key release of the week as traders will want to know if the strength in US consumption is for real or simply a function of unusually warm weather in December. Latest figures from same store sales of apparel retailers give dollar bulls some reason for hope, Furthermore, the rise in energy prices over the past month is likely to have increased gasoline prices which paradoxically will skew retail sales upward. The market anticipates a sharp falloff to 0.3% growth from 0.9% the month prior, so any upside surprise could put the bid back in the greenback. On the other hand, if the data misses or worse shows a contraction, the damage to the dollar could be severe an its not inconceivable that the EUR/USD could climb back to challenge its late 2006 highs.

Retail Sales are of course not the only story next week. The calendar is full of Industrial sector data with Empire. Philly Fed and IP all on the docket and all except the New York survey expected to be lower. Finally the Trade/TICS numbers be out but unless there is a shockingly surprising skew in the TICS the impact is likely to be minimal.

Euro: Trichet Tough as Nails
He used the word “strong vigilance”, he so much as said that he couldn’t really care about the imbalances in the EUR/JPY carry trade and he dismissed the MNI report from the week prior as having no credibility. In short, ECB President Jean Claude Trichet was especially hawkish in his ECB press conference and that tone helped the EURUSD gain 33 basis points against the dollar last week.

Meanwhile the Euro-zone economic data was rather mixed with German Industrial Sales and EZ Retail Sales missing forecasts and the Trade Balance shrinking rather substantially to 10B from 16 Billion projected. End of the week, however, brought some good news from France and Italy where the industrial sector reports were quite impressive, not only beating market expectations but in the case of Italy registering significant upward revisions for the month prior. Overall, this fundamental data should please euro longs because it is likely to contribute positively to Q4 EZ GDP.

Next week the Euro-Zone calendar remains very thin with only ZEW and EZ GDP on the docket. Both gauges are expected to show improvement which could help the euro a bit, but next week’ trade clearly belongs to US data and the euro is likely to revert to its role as the anti-dollar rather than make any waves of its own. The bigger question in the pair remains centered on rates. ECB has telegraphed that it will go to 3.75% in March but anything beyond that remains uncertain- a dynamic that is likely to keep the pair in narrow range.

Yen – Still No Respect
On Thursday we noted, “USD/JPY once again scaled the 121.00 barrier as carry trade flows returned to the pair with majority of dealers dismissing any possible risk from the G-7 meeting this week-end. The pair was also helped by fresh rhetoric from several BoJ monetary authorities who seemed non-committal on the subject of any possible rate hike in the foreseeable future. In fact BoJ policy board member Hidehiko Haru stated that a lower yen was positive for the economy suggesting that any tightening may be put off until Q2 of 2007. Finally, today’s Eco Watchers survey of taxi drivers, waiters and barbers held more bad news for yen longs as it registered a reading of 47.2 versus 49 expected confirming the fact that the Japanese consumer remains mired in a funk. However, the release also held the promise of hope as the future outlook component increased above the important 50 expansion/contraction level to 50.9. The last time this survey popped above 50 was in October and USDJPY embarked on a 200 point downward correction shortly thereafter.”

Trade at the start of the week will be driven by the reaction – if any- from the G-7 meeting over the weekend. Although no one expects any specific language addressing yen weakness even a covert reference on a need for global rebalancing may be enough to trigger a wave of USDJPY selling. The action could be even more interesting given the fact that Japan is on holiday and liquidity is likely to be thin. Once the G-7 drama has passed, the only other event on the Japanese calendar with market moving potential is the GDP release on Thursday. The data is expected to show a vast improvement over the prior quarter jumping to 3.8% growth versus 0.8% growth in Q3. The news may finally provide some positive fundamental foundation for beleaguered yen bulls, especially if the consumption component of the release shows a strong rebound.

Cable Culled on BOE Indecision
The Bank of England’s decision to leave rates on hold in February crushed the British pound last week, with GBP/USD plunging more than 225 points to the 1.9500 level as traders had bet heavily the central bank would make a “surprise” hike for the second month in a row. There was much disagreement on expectations for the decision, as the BOE’s concerns regarding wage growth and broader inflation gave them a decidedly hawkish tone at their January meeting. However, the devil is in the details, and with no policy action in February, we have no statement or minutes by which to gauge whether the BOE’s board is still torn on policy following the previous 5-4 vote to raise rates. Alas, the minutes of last week’s minutes will not be available until the end of the month, but next week’s Quarterly Inflation Report should be able to hold over traders until then, as the release will provide insight into the BOE’s inflation expectations.

In other UK news, BRC retail sales rebounded to 5.2 percent - a three year high, and consumer confidence improved to +84 – but just missed expectations of +85 – which nevertheless signals that a tight labor market has kept consumption resilient and sentiment high. There were also signs that house prices remain strong, as the HBOS measure unexpectedly held at 9.9 percent against estimates of a drop to 9.6 percent. However, data from the start of the year has been decidedly mixed, with last month’s 41 percent plunge in mortgage approvals and declines in other house price indicators pointing to weakening demand as the BOE’s more aggressive tightening bias has started to take its toll. Regardless, the central bank is not likely to completely discount the risks of house price growth until more substantive evidence of a slowdown

As we mentioned above, the BOE’s Quarterly Inflation Report on Wednesday will be the main dish next week while PPI, CPI, and RPI will simply serve as an appetizer. The key factor traders will be looking at in the inflation report is whether or not the central bank finds that there are even greater price risks on the horizon, signaling the potential for further monetary policy tightening. Consequently, should the BOE reflect a new sense of urgency regarding price stability, GBP/USD could resume its ascent towards 2.0000 as 5.50 percent – a benchmark rate 25bps higher than that of the US – may only be a matter of time.

Swissie Steady Despite Falling Prices
The Swiss franc ended the week only marginally higher against the US dollar after the gains from a mid-week rally were slashed on much weaker-than-expected consumer price reports. Swiss CPI dropped 0.7 percent in January, bringing the annual rate to a mild 0.1 percent. While the Swiss National Bank only expects tepid inflation of 0.4 percent for the entire year of 2007, the surprise plunge may indicate some price risk to the downside. This risk could hurt the SNB’s plans for rate normalization throughout the year, as the central bank had been expected to hike at each quarterly monetary policy meeting, possibly bringing rates the 3.00 percent level by year end. However, indications of further tightening of the labor market and resilient consumption indicate that domestic demand should continue to fuel economic expansion in Switzerland. As a result, the SNB may still decide to pursue rate hikes in March, barring an outright contraction of CPI on an annual basis.

With little to speak of in terms of important economic releases next week, Swissie will likely be at the whim of the greenback as event risk is heavily weighted to the latter. Nevertheless, the result of producer and import prices will indicate the status of prices at the factory gate, which will also help to signal potential inflation pressures (or lack of) on the horizon. Meanwhile, adjusted real retail sales are anticipated to ease back to 2.5 percent. While this would point to diminishing consumption, the indicator is notoriously volatile and is not likely to be a major market mover for the Swiss franc next week. In the end, Federal Reserve Chairman Ben Bernanke’s report on the US economy will create the most price action for Swissie, and if the head of the Fed gives the faintest hawkish bias, USD/CHF should surge through resistance at 1.2500 – breaking a significant trendline for the pair.

Labor Market Awakens Loonie
Loonie bulls took over the market at the end of last week as USD/CAD nosedived nearly 125 points to 1.1725 on Friday alone. The spark for this price action? Labor market reports. Although the unemployment rate edged higher to 4.6 percent, the net employment change rocketed up 88,900 against estimates of a more mild rise of 13,500. A breakdown of the data was equally encouraging, with job growth indicated in both the full time and part time fields. Furthermore, the rise in the unemployment rate was due to a jump in the number of people seeking work. Meanwhile, Ivey PMI surged back above the 50 level to 53.8, indicating that the drop to contractionary levels may have been a one-off event and signaling that the manufacturing sector is still alive and well. Reports out of the housing sector were mixed, however as starts saw a large jump to 249.3 while building permits declined 7.8 percent. The drop in permits bode particularly ill for the sector, as they tend to be more of a leading indicator, whereas starts are usually somewhat lagging. Nevertheless, the economic data for the week painted a rosy picture of the Canadian economy, as continued growth in the manufacturing sector should keep labor conditions tight and also fuel consumption growth.

Economic data over the course of the next week is fairly light, with international merchandise trade anticipated to post at C$4.7 once again while a 5.0 jump in new motor vehicle sales could point to stronger spending. However, the majority of the week may belong to the US dollar, as Federal Reserve Chairman Ben Bernanke’s report on the economy and Fed policy will shake up the market, especially if he hints at any sort of policy bias. Additionally, the oil price factor could come into play at any point. With geopolitical risk coming to the forefront again, and record cold temperatures blanketing US, crude could edge back up to the $60/bbl level once again. The combination of central bank commentary and oil price action may be the perfect storm to topple USD/CAD from its recent highs or send the pair tumbling once again.

Aussie Calendar May Supply More Volatility
It is hard to believe the Australian calendar could support so many indicators. Last week, a broad array of top-tier releases offered a look into multiple facets of the Australian economy. Perhaps the most comprehensive view was for the consumer sector. Starting upstream, net employment slipped by 3,600 people, a far cry from the 46,000 addition in December – but the jobless rate stepped back down to a three-decade low. In turn, both the CashCard Retail Index for January and the government’s retail sales data for the fourth quarter came in above expectations. Elsewhere, the housing market came into focus, with decidedly less optimistic results. Building approvals for the end of the year dropped 1.9 percent while home loans for the same period missed expectations with a tame 0.1 percent pick up – suggesting the RBA’s previous rate hike is taking effect. The anchor of the week was also the biggest disappointment. The RBA’s monetary policy committee passed on any additional rate hikes until data provides more reason to tighten. However, January’s TD inflation gauge may already offers clues to the future trend in price levels after the annual figure slowed from 3.8 percent to 3.1 percent, just outside central bank’s target band.

Over the coming days, technicals will begin to cry out for fundamental triggers, though it will not be guaranteed. The fourth quarter housing price index holds a substantial amount event risk. The market is prepared for a mild deceleration, though lending growth and a spendthrift consumer may show the opposite. Also on deck are the proprietary NAB business confidence and the Westpac consumer sentiment gauges, which will offer the most up-to-date data for speculating on the direction of the economy. When all is said and done though, the most market moving event may end up being the RBA’s quarterly Monetary Policy Statement. In November, the group projected a ‘sharp’ drop in inflation and a pick up in growth, with both projections coming to fruition. Now the market will expect changes or at least updates.

Kiwi Gears up For Key Inflation and Retail Sales Figures
The Kiwi finished relatively unchanged throughout the past week of trade, as earlier strength clearly faded following a misleading Labor Data report. As the only significant economic data on the ledger, tensions ran high ahead of this critical event. Indeed, the volatility that followed was testament to the labor market’s importance for the Kiwi economy. Currency traders initially sent the Kiwi sharply higher on a seemingly impressive headline print—with the unemployment rate falling to 3.7 percent in Q4, 2006. A closer examination of the report led to a subsequent retrace, however, as the underlying loss of jobs pointed to labor market weakness and not strength. As we argued in our Wednesday Cross Markets Report, a deceivingly positive unemployment drop left risks to the downside for the New Zealand dollar. Soft employment figures likewise leave risks to the downside for the week ahead, as Wednesday’s key Retail Sales figures may disappoint if consumers experience slower job growth.

The coming week promises far more event risk for the Asia-Pacific currency, with significant inflation data to be followed later by Retail Sales figures. Currency traders hope that Monday’s Producer Price data shows relatively elevated price risks for the New Zealand economy, boosting the likelihood of higher interest rates through the medium term. Given hawkish RBNZ rhetoric, it seems that it will take relatively little for the central bank to move further on rates. If PPI figures come in soft, however, we could easily see the New Zealand dollar fall further off of recent highs. If PPI comes in neutral, on the other hand, currency traders will likely gear up for Wednesday’s Retail Sales survey. Consumer spending is typically an important number for any economy, but it is especially significant for this small island nation. Strong employment growth has sparked an impressive trend in consumption, driving broader economic growth and prompting monetary policy tightening. If this is to continue—and boost the likelihood of rate hikes down the road—the Retail Sales numbers must rise well-above their previous reading.

Boris Schlossberg is a Senior Currency Strategist at FXCM.