US Dollar
Living up to its reputation, it has certainly been a volatile Friday the 13th. The G7 meeting is on everyone’s minds as finance ministers and central bankers of the Group of Seven convene in Washington. The volatility in the currency market reflects speculation on whether the Japanese Yen will come under official criticism at the meeting. Going into the US trading session, carry traders were taking profits ahead of the meeting while others went long Yen in hopes that some ministers will either moan or groan about the Japanese Yen or the Euro. However shortly after the release of the US data, which the market completely ignored, there was news citing that a G7 source confirmed no changes to the foreign exchange language in the communiqué. This sent the market reeling with the US dollar and British pound shooting up 100 pips against the Japanese Yen in less than 30 minutes. The market bought into that, before realizing that it was only a rumor. Italian officials came on the wires shortly afterwards saying that the G7 may still discuss the yen and one-way bets. We will not know the true outcome until 7pm tonight when the communiqué is actually released. For the time being, the carry trade still remains king with even low yielding currency pairs like EUR/CHF extending its gains. Currency traders around the world have an aggressive appetite for yield and unless they have a concrete reason to bail out of their trades, the moves will continue. The G7 has the potential to give these traders their “reason,” so watch out for any major criticism of one way bets or comments on the yen and the euro. The US trade balance and headline producer prices came out stronger than expected today, but there were underlying weakness in both. Lower oil prices reduced the import balance in the month of February while the rebound in oil prices drove headline producer prices higher in March. Core prices were flat, but the disappointment will not be enough to sway the Federal Reserve to cut interest rates anytime soon. Unlike the past week, the third week of April will be exceptionally busy. We are expecting a ton of important US data including retail sales, housing data, net foreign purchases of US securities and CPI.

Euro
With the wind behind its back, the Euro has set yet another 2 year high against the US dollar and record high against the Japanese Yen. As we said in yesterday’s Daily Fundamentals, “the technical and fundamental break in the currency pair puts the odds in favor of a test of the December 2004 1.3667 high.” With one guaranteed rate hike along with the possibility of another, the Euro has been a big winner. The euro does face some G7 risk. EUR/JPY has been one of the best performing currencies over the past 6 weeks, racking up far larger gains than USD/JPY. What rises the fastest could also fall the fastest. Therefore should the G7 crack down on the Yen, we could see larger losses in EUR/JPY that USD/JPY, which means that the Euro could under perform the US dollar. However in the grand scheme of things, even if the G7 criticizes Japan about the Yen, when the markets settle (and it could be a few hours, a few days or a few weeks), carry will return as traders realize that the Japanese really can not do much to boost the value of the Yen. Looking ahead, consumer prices, the German ZEW survey and the ECB monthly Bulletin for the month of April are the key releases on the Eurozone calendar next week. However these should fall secondary to the US data releases.

British Pound
Four straight days of gains has helped the British pound end the week on a very strong footing against the US dollar. Reports of accelerating wage growth and higher department store sales only confirms the notion that the Bank of England will need to raise interest rates once or twice this year. With the FX market obsessed with the currencies of the countries that are increasing interest rates, the GBP/USD could challenge its 14 year high of 1.9916. The only thing that can stop the rally is if the minutes from the Bank of England’s monetary policy meeting held earlier this month reveal that the votes in favor of a rate hike have not shifted. The market is betting that the BoE will raise rates as early as May. Should the minutes reveal otherwise, currency traders would have to adjust expectations, which means we could some weakness in the British pound. The UK economic calendar next week is just as busy as the US calendar. We are expecting reports on the trend of house prices, inflation, the state of the labor market and retail sales. These are all important indicators of how the economy is doing, so expect it to be a big week for the GBP.

Japanese Yen
The Japanese Yen is the story of the day as the market tries to handicap the outcome of the G7 meeting. It won’t be long before the story unfolds with the decision expected a mere few hours after the release of this report (7pm EST). The G7 meeting has often led to big moves in the currency market that can last for months. This upcoming G7 meeting is not expected to deliver the blockbuster moves that we have seen in the past as the Japanese defends its currency’s value and remains unable to raise interest rates with low inflation and lackluster growth. The only choice they have is verbal or physical intervention. So far, their comments conflict with what would be characterized as verbal intervention as they have focused on talking about how solid the Japanese economy is.

Commodity Dollars (AUD, NZD, CAD)
The Australian and New Zealand dollars continue to perform extraordinarily well with the NZD/USD racking up over 1 percent gains today. New Zealand retail sales nearly quadrupled expectations by accelerating 1.9 percent compared to a 0.5 percent forecast. This only adds fuel to the fire as the market is aggressively bullish the commodity currencies. New Zealand and Australia both have inflation releases next week which could fuel more speculation for a rate hike. Unfortunately the Canadian dollar did not rally along side its commodity currency peers. The market was looking for more hawkish comments from Bank of Canada Governor Dodge, but he simply reiterated the bank’s balanced outlook. Canada will be releasing CPI, retail sales and the BoC quarterly business survey next week.

Richard Lee is a Currency Strategist at FXCM.