Dollar Dumped on Dour Data
A slew of negative economic data throughout the week finally weighed in the dollar and pushed the greenback to 2007 lows by the week’s end. The pair tried, but failed to take out the 2006 highs of 1.3348, however the bias in the EURUSD remains to the upside as the latest batch of news suggests that the implosion in the housing sector is beginning to spill over into manufacturing and consumer spending. As we wrote on Friday, “Lackluster results from the manufacturing sector which showed very tepid numbers from Philly Fed along the largest month over month decline in Empire Manufacturing readings suggested that the contraction in housing may be creeping into other parts of the US economy. Taken together with Tuesday’s limpid Retails Sales, this weeks US data indicates a clear US economic slowdown that may in the words of some analysts, “become much worse before it becomes better.”

Next week housing data takes center stage as Housing starts and Existing Home Sales are both set on the calendar. The Fed decision is sandwiched in between but the market expects no change from the US monetary authorities. In fact traders will monitor the statement for any acknowledgement of the sub-prime fiasco. However, given the Fed’s penchant for hawkishness the FOMC is likely to stress the increases in the latest batch of inflationary data, but ultimately the FOMC bark will be much larger than its bite as the slowdown in US growth will put a freeze on any policy action. At the very best dollar bulls can only hope that Fed officials keep rates steady through the summer maintaining the interest rate differential advantage against the euro and the yen. However, if next weeks housing data shows any ugly surprises to the downside, talk of recession is sure to sweep the dealing desks and the greenback may take out the 2006 lows.

Euro - ECB Remains Hawkish
A very quiet calendar this week offered few economic triggers but the relentlessly hawkish rhetoric from ECB officials put the bid in the euro and kept it well supported all week. One piece of economic news that saw little initial reaction was the larger than expected rise in Eurozone Labor costs. As we stated on Thursday, “While the market ignored the data, we believe it could play a very important role in determining the monetary policy of the ECB. The European central bankers are particularly concerned about controlling wage inflation and may decide to initiate a “pre-emptive” rate hike in May rather than the current market expectation of waiting until June. Certainly the recent commentary from ECB officials from Liebscher to Garganas, suggests that the European monetary authorities’ remain steadfastly hawkish. Therefore, while tonight’s labor cost report generated little immediate impact it may carry far more influence in the long term.”

Next week again sees very little meaningful event risk on the Eurozone calendar with only the Trade Balance and Industrial New Orders possibly generating mild interest. The long term story of the Eurozone continues to be one of decoupling from the US as the G-2 economy grows at a faster rate and its central bank continues to pursue a tightening policy. However, in the short term, having scaled 2006 highs, the unit may be due for a pause especially if US data next week proves to be dollar friendly.

Yen – Mirroring the Equity Market
The single most correlated trade in all of financial markets last week was the relationship of the USDJPY to the Dow Jones index. The moves were so uncannily parallel that CNBC took to showing the tick by tick comparisons of the two charts. As Dow Jones rose and risk appetite returned USDJPY rose and when equities sold off so did the currency pair. This relationship appears destined to continue a bit longer, for even as we open Sunday Asia trade the USDJPY is once again trading with the equity market, rallying as the Nikkei rises.

The yen/equity market relationship has pushed all other economic news to the back stage. Last week’s strong Tertiary Index readings had little impact on trade yet this week’s economic calendar may begin to exert a stronger influence on currency trading especially at the start of the week when BOJ announces its target rate early Tuesday morning. While no one anticipates a hike, traders will want to see if the central bank offers any hints of potentially another 25bp hike before the June parliamentary elections. Japan’s PM Abe has quickly managed to squander most of the goodwill generated by his predecessor Junichiro Koizumi with ill advised comments about Japan’s action in WWII and now appears to be in serious political trouble. Given such a state of affairs the BOJ may be reluctant to aggravate an already incendiary situation. On the other hand, with PBOC announcing yet another rate hike over the week-end, the pressure on BOJ to tighten its own monetary policy has clearly increased. By remaining too accommodative as Japan’s economic growth returns, the central bank threatens to undermine its own credibility and this tension between political consideration and economic need is likely to sustain the volatility in USDJPY for the week to come.

Sterling - Mixed as Market Uncertain of Bank of England
The lackluster price action in sterling reflected the broader uncertainty of the market regarding any forthcoming rate hike from the BoE. The data was generally pound bullish but not overly so to convince most market players that BoE would act anytime soon. PPI and wages continued to increase slightly above expectations but RICS housing survey showed a small decline suggesting that the price growth in the sector may be flat-lining .

Next week, more housing data from Rightmove, which as we go to print is actually rather bullish along with CPI and retail Sales make tip the scale to pound bulls if their reading print hotter than expected. Finally, the BOE minutes will provide further clues to the current thinking of the central bankers. Traders will particularly focus on the vote count to get an idea of the overall hawkishness of the MPC members. The UK economy has become the “hedge fund” economy and with recent volatility in the global financial markets, the risk of a slowdown in the UK GDP remains high. However, if global equity markets return to equilibrium and UK data proves buoyant the pound could attract risk capital once again and stage a rally as the week progresses.

Swiss Franc Rally Shows Few Signs of Slowing
A surprisingly hawkish Swiss National Bank was enough to send the Franc to fresh 4-month highs against the US Dollar, while a later consumer spending figure only added Swissie bullishness. Analysts expected the central bank to soften its hawkish tone on signs of very low inflation, but officials reaffirmed their monetary policy tightening bias and effectively foreshadowed a further 25bp rate hike at their next meeting. Short term rates remain at a low 2.25%, keeping the USDCHF carry trade in play, but the currency pair’s recent downtrend shows few signs of slowing. Data in the upcoming week will be limited to largely second-tier reports. As such, the CHF is more likely to respond to developments in market sentiment across broader global markets.
Upcoming Industrial Production and Producer Price reports are unlikely to garner significant attention in Swissie trading. Given continued strength across a broad swath of economic indicators, economists fully expect that domestic industry rebounded through the final quarter of 2006. Producer and Import prices are also unlikely to cause a stir; consumer prices are typically seen as the more significant report and were unable to cause a sustained USDCHF rally. In fact, markets are likely to ignore short-term inflation data as the Swiss National Bank has made it clear that price pressures are may to pick up only in the second half of the year. This leaves the Swiss Franc without clear fundamental biases through the coming week of trade, except to note that the low-yielding CHF and JPY will continue to trade off of changes in risk appetite across world financial markets.

Loonie Declines on Soft US Economic Data
The Loonie was one of the few currencies to drop against the US dollar, as bearish second-tier Canadian economic data allowed traders to buy the USDCAD. Likewise disappointing US news was not enough to force any significant down-moves in the North American currency pair; Canada’s dependence on US leaves it inextricably linked to the strength of the American consumer and traders feared that US slowdown would hurt the Loonie more than the greenback. The US dollar’s continued downtrend against major currencies may not necessarily result in USDCAD declines. In fact, if such Greenback bearishness is due to sour economic news, the CAD is likely to post similar drops against other major currencies. If, on the other hand, the US dollar continues lower for monetary policy or equity market sell-offs, we could see the USDCAD resume its two-week downtrend.

Two key reports will be the highlights of Canadian economic news, with Tuesday’s CPI numbers to be followed by Wednesday’s Retail Sales figures. Markets are fairly confident that domestic short-term interest rates will remain at 4.25% for some time to come, but any surprises in the upcoming inflation figure could skew biases to the downside. The Bank of Canada surprised many when they voiced a largely neutral stance on monetary policy, stating that current rates would be necessary to ensure long term price stability. If core price inflation shows material signs of slowing, the BoC may opt to loosen monetary policy in the face of slowing US growth. The strength of the domestic consumer will subsequently come into focus through Wednesday’s Retail Sales print. Astounding gains in recent payrolls reports suggest that consumers will continue spending strongly through the medium term. This arguably leaves risks to the downside from a foreign exchange perspective; a positive surprise is unlikely to cause a material CAD rally, while a disappointment could cause the Loonie to further retrace gains. A likewise bearish technical outlook in the C$ may leave the USDCAD higher through the coming week of trade.

Aussie Advances as Markets Quietly Price in Another Hike
Armed with a potent listing of economic indicators and an attractive overnight lending rate, the Australian dollar covered considerable ground against its major pairings last week. However, nowhere was this strength more perceptible than against the ailing US dollar as the unit rallied over 175 points to come within striking distance of multi year highs at 0.80. And, in retrospect, reaching these technically important levels didn’t seem too difficult. Rewinding to the previous weekend, a quick scan of the forthcoming calendar would have revealed the true breadth of what was to come. Housing-related indicators for January started the week off with a view of economic growth and consumer spending. Looking to expand on the latter theme, the Westpac Consumer Confidence survey joined forces with the government’s labor data to make it a truly bullish week for the Australian economy and its currency. According to the proprietary report, consumer confidence grew in March despite firmer energy prices and a considerable correction in the stock markets. Even more impressive, employers took on 22,000 new workers last month, feeding into the strongest component in the Australian economy: the consumer sector.

Looking ahead, there are very few economic indicators on the calendar – and even fewer that have any hope of actually influencing the mood of the Aussie dollar. The only indicator boasting any surprise potential at all is the fourth quarter Dwelling starts report. Officially, economists expect the report to slip 0.8 percent in response to the 25 basis points tacked on to the overnight cash rate by the RBA on November 7th. While there are no direct and reliable indicators to support this projection, the consistent slide in home loans and a two-year low in the HIA new home sales report offer a decent consensus. However, with the data pushed aside, Aussie dollar traders may still have their volatility as the currency market carefully considers its yield appetite. Recently, the heavy flow of carry trade unwinding has been synched to a trickle. Without the encouragement of a stock market crash or some other exogenous event, the appeal of a 6.25 percent yield may once again shine for those looking to consistently collect on the carry. What’s more, the 6.25 percent benchmark rate may receive yet another 25 basis point hike according to futures markets. According to recent valuations, a quarter point-hike is expected by June. With such a hawkish outlook, few things could cloud the Aussie’s run. Unfortunately for bulls, big technical levels and a BoJ rate decision may be on that short list.

Empty Calendar Leaves Kiwi to the Will of Broader Markets
The Kiwi dollar was able to retrace mid-week declines, as sharp drops in its US namesake allowed it to challenge significant resistance at the 0.7000. The resilient strength of the New Zealand economy was nowhere more evident than mid-week Retail Sales numbers; a strongly positive surprise underlines robust consumer demand. It is exactly this kind of consumption growth that has left New Zealand with the highest short-term interest rate of any country with a top S&P Sovereignty rating—increasing its currency’s attractiveness to global investors. A slow shuffle back into the now-infamous carry trade has in fact more than halved the Kiwi’s recent declines and raises the prospect of further appreciation. Given a squarely empty economic calendar through the coming week, such gains will have to come on a broader global shift to risky assets and leaves the currency exposed to renewed waves in risk-aversion across highly speculative financial instruments.

Monday’s Visitor Arrivals Survey is hardly a market-moving economic data release. As such, even the most powerful of surprises is unlikely to cause substantive moves in the New Zealand currency. It is worthwhile to point out, however, that continued net immigration has been a net-positive for the domestic economy. A robust labor market and a strong NZD leave the small island economy as a prime target for relocation. Such immigration has kept wage inflation somewhat lower, but increased consumption has clearly made its mark on household expenditures. We look for Visitor Arrivals to continue gaining, but actual developments in the New Zealand Dollar will likely be driven by broader international investor sentiment.

Boris Schlossberg is a Senior Currency Strategist at FXCM.