Is Dollar Ready For A Bounce?
US economic news left no smiles on dollar longs faces as the data suggested mostly stagnation and a slowdown. The one exception to the generally dour tone of the releases was Retail Sales which rebounded to 0.7% versus 0.6% projected, however ex-gasoline the number only increased 0.4% leaving the currency market unimpressed. In other sectors of the economy the news was even less impressive as manufacturing slowed to a crawl with both Empire and Philly Fed missing forecasts. Most disconcertingly of all however was the steady upward creep in jobless claims for the second week in a row. As we noted on Thursday” Weekly jobless claims are generally a minor event but this week’s release may take on a much stronger significance. Last week the report saw a sharp increase to 342K from 323K the week prior. For now the market considers that spike in claims to be an aberration and looks for a return to 325K. However, should the data surprise to the upside once again it could weigh very heavy on the greenback as all of the dollar bear concerns about the contraction in housing leading to a loss of jobs and a possible US slowdown will once again rise to the surface.” With the jobless number printing at 338K alarm bells are starting to ring.

Despite, a decidedly downcast set of data, dollar’s decline against the euro was relatively small as the pair failed to take out all time highs at 1.3660 set in 2004. Many analysts may argue that it is simply a matter of time before the pair reaches that barrier, however greenback longs may see some reprieve next week if the housing data (both Existing and New Home Sales) surprises to the upside. With sentiment so dour, even an inline print may help the greenback. However, if housing reports once again show another monthly decline, dollar defenders will run out of excuses as the contraction in housing is sure to exert its slow bleed on the rest of the economy. Should that be the case the pair is likely to see new highs.

How Much More For The Euro?
The euro continued to chug along rising mainly as a result of disappointing US data, as the Euro-zone calendar was remarkably barren of any top tier reports. The ZEW survey proved to be supportive printing at 10.7 versus 7.5 expected, but that release only has a limited impact on the market and traders’ attention was focused more on commentary from fiscal and monetary officials. To that end, Jean Claude Junker’s comments that euro strength should not hurt the pace Euro-zone growth offered some more support to euro bulls. However, the price action in the pair is starting to look tired. ECB officials are clearly concerned with the appreciation of the currency and will most probably delay the next rate hike to June rather than May. As the currency market begins to absorb the fact that immediate yield gains are forthcoming, the unit could well come under pressure from profit taking from the specs.

Next week the IFO survey stands as the key event risk of the week. But before markets analyze economic data they may have to address the Presidential election in France. This Sunday the French go to the polls for the first run-off of the election. The two front runners include the center right candidate Nicolas Sarkozy and the center left candidate Ségolène Royal. The two are favored in the polls, but with 40% of electorate undecided, a third candidate Francois Bayrou may be able to stage an upset. While the choice between Sarkozy and Royal is clear, Bayrou has made it a point to not commit to a specific agenda. Furthermore, polls also show that he has a good chance of beating either one of the front runners in the second round of elections. Should Bayrou win the currency markets which are always jittery when faced with a political unknown, may sell euro first and ask questions later. Once the political risks are out of the way however, the IFO will be the marquee event of the week. Given positive reading from the ZEW the currency markets look for strength in the IFO as well. If it prints as expected, it will indicate that European manufactures are unconcerned with the strength of the unit. However, if the number misses, it will only add to the worries by many in the Euro-zone that rise in the currency may be becoming counterproductive.

The BoJ to Announce Rates: Is Anyone Listening?
G7 jitters did relatively little to shake the Japanese Yen out of its continued downtrend; an unchanged official stance on currencies provided no motivation to shift overall market sentiment. In fact, finance ministers and central bank authorities reiterated much of the same rhetoric we heard following the last G7 summit: “exchange rates should reflect fundamentals” and “Excess volatility and disorderly movements in exchange rates are undesirable for economic growth.” These words left the much-feared G7 summit as a non-event and allowed speculators to continue selling the low-yielding Yen against its major international counterparts. A mid-week Yen rally threatened to derail high-yielding currency pair gains, however, with a sharp drop in Asian stock markets fueling a flight to safety across all asset classes. A rebound in risk-sensitive pairs temporarily assuaged fears of a more pronounced carry trade unwind, but markets are clearly on edge with any similar events to spark pronounced Yen rallies.

The coming week will bring the usual month-end flurry of Japanese data releases, but it is not entirely clear that markets will actually react to anything but the most significant surprises in economic fundamentals. As such, it is difficult to predict that any one event will be enough to slow recent JPY declines. Notables on the ledger include March employment and inflation data, with very minor risks posed by the coming Bank of Japan target rate announcement. Unless the National CPI result returns into significantly positive territory, the central bank will continue to call for stable interest rates in the face of negligible risks of inflation. To this end, Yen bulls hope that the Retail Trade Survey which will re released at the same time, will show that a pickup in consumer demand that should ultimately translate into higher prices. In the absence of strongly positive economic surprises, it seems fairly likely that the Yen will continue to lose against its higher-yielding counterparts. Changes to this outlook will largely depend on risk-aversion across global asset markets. If we see a pronounced flight to safety across risky investments, we are almost guaranteed to see a similar shift away from the otherwise attractive Japanese Yen shorts.

UK Economy to Continue Chugging Along
Surprisingly strong economic data propelled the British Pound to multi-decade highs against its US counterpart, with unflagging bullishness leaving risks and momentum to the upside for future price movements. Exceedingly high consumer price and wage inflation readings combined with a robust Retail Sales report to send the GBP/USD above the 2.0000 level—an occurrence last seen in September of 1992. These remarkable gains leave us with little historical precedent to confidently predict a reversal in pound strength, but the coming week’s Gross Domestic Product report may offer some clues on the true fundamental strength of the UK economy. Markets now expect that the Bank of England will definitely raise rates by 25 basis points to 5.50% through its May announcement, but much of future Cable strength will depend on whether the bank goes to 5.75% in the second half of 2007. As such, first quarter GDP readings may prove essential to outlook for further rate increases; the bank is unlikely to continue tightening unless overall economic growth stays at or above trend through 2007.

Risks arguably remain to the topside for the coming GDP report; the Bank of England itself has said that it expects Q1 growth to be stronger than previously forecast. Market estimates of a 0.6 percent quarter-over-quarter change would leave GDP at its lowest since mid-2005, leading many to question the logic below such a low number. Indeed, strength across a broad swath of economic indicators suggests that economic expansion remains on solid footing in Europe’s second-largest economy. Implications for currency markets are nonetheless mixed. If GDP surprises strongly to the topside, we are likely to see continued gains in the British Pound. Such consistent appreciation could be shaken, however, if data is at-consensus or slightly below. Markets are growing used to better-than-forecast UK economic data and such extremes in sentiment often coincide with major turns. As such, we await Wednesday’s GDP report with a sense of trepidation; slower-than-forecast expansion could easily lead to a GBP pullback.

Will KOF Break Swissie’s Stride With Yen?
The Swiss franc managed to gain this week on the back of stronger than expected retail spending and indications that prices at the factory gate were starting to rise. Adjusted real retail sales printed at a better-than-estimated 4.5 percent in February, as the volatile indicator continues to point to resilience in the consumer arena. Meanwhile, producer and import prices rebounded to 2.4 percent year over year, which only reassured the markets that mild pressures will not deter the Swiss National Bank from pursuing interest rate normalization this year.

Nevertheless, the USDCHF descent towards 1.2000 has had little to do with Swiss fundamentals as the pair’s price actions have been contingent on broad dollar flows in other low-yielder, USDJPY. Will Swissie start to move on its own accord? Should the KOF Leading Indicator rise once again in April, perhaps. The figure is anticipated to hit a six-month high of 2.00, as the sturdy Swiss economy wears on with the help of robust domestic demand and strong export growth – especially as products out of the country are particularly cheap relative to other European products with EURCHF up more than 300 points since the beginning of the year. Given the resilience of the Swiss economy, one of the healthiest and most stable in the developed world, traders may start to price in the potential of continuous quarterly rate hikes throughout the rest of the year. However, with major support at the 1.2000 level coming from the 78.6% fib of 1.1878-1.2576, it will take a serious bout of bullish Swiss franc sentiment to see substantial USDCHF decline. As a result, USDCHF may be more likely to bounce above the 1.2100 level as technical price action takes over and the Swissie struggles to break free of the greenback’s pull.

Canadian Dollar Traders Debate Data’s Affect On Coming Rate Decision
Last week was a busy one for Canadian fundamentals, and a quick look at the USDCAD chart reveals that it was also a good one for the Loonie. Eternal Loonie bulls have long been looking for another rate hike. However, probabilities were still strongly in favor of a persistent neutral bias as the threat of slowing US growth countered the promise of strong domestic spending. Nevertheless, the consumer price index measurements for March may have improved the hawkish rate outlook – albeit modestly. Statistics Canada reported annual inflation accelerated more than expected to an an eight-month high 2.3 percent pace on the back of rising housing and gasoline costs. A point of contention though, the core figure stepped back from its highs (as expected). The retail sales report added further momentum to the Loonie, as the ex auto sales figure blew away expectations with a 1.0 percent print.

In the week ahead, a few indicators will grace the economic calendar; but their impact is questionable. The only event that even has a chance at exciting the currency market is Tuesday’s Bank of Canada rate decision. As was suggested above, there has been a low buzz over the possibility of a rate hike from the monetary policy group. However, the chances of such at this meeting – despite the considerable improvement in data – is slim. In fact, most of the speculation of a possible boost in the overnight lending rate is reserved for future gatherings, and for good reason. BoC officials will likely hold off on hastily responding to an undeveloped turn in domestic spending numbers when their principal concern for cooling inflation is still a very real issue. Governor David Dodge made it clear that the central bank policy group viewed slower US growth as a potential anchor on Canada. With this in mind, a rate hike before the US government releases its first quarter GPD numbers would seem a misstep – especially since it is expected to cool even further. Though the BoC is expected to hold its rates, the Loonie’s rally against the dollar could persist as short-term interest rate futures are still clearly pricing in expectations of a hike from Canadian officials this year, while the market is holding out for a rate cut from the Fed over the same period.

Aussie Could Lose 17 Year Highs On Easing CPI
The Australian dollar faltered just below 17 year highs near the .8400 level as mixed second-tier releases gave the currency little impetus to make any big moves. Indeed, demand for high-yielding currencies kept Aussie bid, similar to the New Zealand dollar which held onto its highs as well. In economic news, Westpac Consumer Confidence eased back to -0.2 percent – the lowest since November – as households became increasingly concerned that the Reserve Bank of Australia would tighten monetary policy at their next meeting. On the other hand, the Conference Board Leading Index surged 1.4 percent, helped by a pickup in bond yields and the yield spread – a direct result of rate hike expectations - and a jump in rural goods exports.

Despite all of the minor indications that the Reserve Bank of Australia will raise rates in May, traders are really waiting for the release of Consumer Prices for the first quarter before placing their bets. The quarterly figure is anticipated to surge 0.6 percent, however, the annual rate is forecasted to slow to a one year low of 3.0 percent. If inflation slips in line with estimates to the RBA’s ceiling, Aussie could be in for retracement lower, especially as the pair has shown hesitance to break above resistance, since the central bank will be more likely to leave rates steady so as to not risk unnecessary cooling of the economy as price pressures ease. However, traders should be prepared for a hotter-than-expected release, which would send a flood of AUDUSD bids into the market to make .8400 a thing of the past, and could be a major driver to keep the lucrative carry trade going.

Kiwi Holds 25-Year Highs Until RBNZ Points The Way
Two opposite forces guided the kiwi dollar last week: a scare that another wave of risk aversion is at hand and good-old fashion inflation which managed to push the unit to 25 year highs against the greenback. Working with the issue that held the market’s attention for the shortest time, jittery investors were ready to sell their risky assets and unwind their passive carry trades last week at any sign of another massive drop in Chinese equities. The paranoia began when Chinese officials delayed their quarterly growth and inflation numbers until after the close of local capital markets. Traders took this delay to mean that hot inflation and growth would lead to another rate hike from PBOC While the markets initially sold off on the fretful outlook, they quickly recovered and currency traders once again turned their attention to NZ inflation numbers. According to the government’s report, pressures rebounded over the three months, though they slightly missed projections with a 0.5 percent print. At the same time, the annual gauge unexpectedly slipped from 2.5 percent to 2.4 percent.

While the inflation data was disappointing, its may not truly let down the market until later this week. The Reserve Bank of New Zealand is scheduled to deliberate on interest rates Thursday morning in Wellington. Economists expect the policy board will keep the overnight cash rate unchanged at a record high 7.50 percent, but arguments exist for those on both sides of the fence. For the minority, the persistent pressure in the housing and consumer sector clearly maintain hawkish undertones. RBNZ Governor Alan Bollard made it blatantly clear to New Zealanders, economists and traders that unless consumer spending and housing growth lets up, he would pursue further rate hikes. On the other hand, annual inflation has held below the central bank’s 3 percent tolerance threshold for two quarters in a row. What’s more, the policy group lifted rates to a record last month. A second move in so many meetings would seem overtly aggressive even for the RBNZ. It seems somewhat symbolic that the NZDUSD is holding off on breaking its psychological 0.7500 barrier until the RBNZ can officiate the move. In then end though, should the bank hold as expected, a wave of relief selling could follow as event risk passes.

Boris Schlossberg is a Senior Currency Strategist at FXCM.