Dollar Rebound? Housing Holds the Key
Despite colder than expected PPI numbers, the first negative Retail Sales since September and a wider than expected Trade deficit the greenback gained ground against its major counterparts this week as the data, while weak was not horrid. Retail Sales were a case in point. The market was looking for a poor print, but because of the early coming of Easter and unusual weather patterns many analysts suggested that the market look at March and April numbers together, instantly coining a new term in financial media – Mapril. While April numbers were quite weak, March data was revised higher, so the blended results did not look as bad

The greenback was also aided by a relatively hawkish Fed which continued to emphasize inflationary risks and left little doubt that it would not event consider lowering rates unless US economic growth deteriorated materially. Therefore, the dollar remains supported by the interest rate structure as US short term rates remain 175 basis point above the Eurozone.

Next week the calendar has plenty of US economic data, but its tone may be rather mixed. The key to dollars continued rebound is US housing data. After months of brutal negative surprises, traders need to see some signs of stabilization. That’s why Tuesday NAHB Housing Survey and Wednesday’s Housing Starts and Housing Permits releases are critical to the dollar bull case. Further contraction in the sector will only fuel speculation that US is on the brink of recession. A better than expected print however will go a long way to bolstering the dollar long’s argument that problems remain contained.

In addition to housing the market will scrutinize the series if manufacturing survey from Empire to Philly to IP. Given the greenback’s recent slide manufacturing should fare better this month, providing further support for the buck.

Euro: What Gives?
Jean Claude Trichet followed his script to a tee, stating that “strong vigilance” was needed, his code word for raising rates at the next meeting. The announcement was expected but as our colleague Kathy Lien noted, “Unfortunately, doing exactly what the market expected was probably the worst possible outcome. Four percent money has long been priced into the market. What traders were really looking for was a hint of further rate hikes in the months to come. When faced with this question, Trichet said point blank that he won’t comment on what they will do after June. The central bank clearly wants to wait for another month of economic data before deciding whether to bring interest rates up to 4.25 percent. “ In short, with 4% money baked into the price the euro had little forward momentum despite posting very impressive German Factory orders and Trade Balance figures

Next week GDP from Germany, France and the EZ overall takes centre stage. The case for decoupling between the EZ and US will be tested on Tuesday. If the number prints hotter than the expected 3.0% talk of additional rate hikes will surely permeate through the market. With EZ growth nearly 200 basis better than US growth while its rates remain 200 basis points lower, traders will look for more adjustment in the imbalances and could rally the euro once again.

Bank of Japan to Announce No Change: When Will They Hike?
The Japanese Yen saw an atypically volatile week of trade, as a return to risk aversion forced a strong JPY rally before a bounce in stocks left it almost exactly unchanged from Sunday’s open. Economic data elicited little, if any, reaction from forex speculators—a trend that is likely to continue until the Bank of Japan resumes monetary policy tightening. Markets were clearly more concerned with global investor sentiment; equity tumbles were blamed for similarly large moves in the high-flying EURJPY. The declines seemingly provided better entry points for EURJPY longs, however, as the pair finished 150 points off of weekly lows. Whether or not the JPY’s downtrend may continue will largely depend on the future of key stock indices, but the coming week of economic data may garner interest on significant surprises in key figures.

The Japanese economic calendar will be a good deal busier than in weeks past, but event risk may be limited to the all-important GDP release due Wednesday morning. Earlier week data will likely show that the Domestic CGPI survey showed strong gains in corporate service prices through the recent sampling period, but the Bank of Japan has paid little attention to the index through past monetary policy statements. The Current Account balance may receive passing interest, but it will take a truly noteworthy surprise to drive significant moves in the Yen. Otherwise, markets will be left to wait for Wednesday’s Gross Domestic Product report. Consensus forecasts show that economists predict that Japanese expansion slowed significantly through the first quarter, but a 2.7 percent annualized gain would nonetheless prove bullish for the overall health of the economy. From an international perspective, the domestic GDP growth rate would still equal twice that of initial US GDP figures at 1.3 percent. The simultaneous GDP Deflator number will likewise shed insight on overall inflation developments in the world’s second largest economy; forecasts of a 0.4 percent decline show that price pressures are nearly non-existent for the Asian giant. Finally, Yen traders will keep a keen eye on Thursday’s BoJ Monthly Report and rate announcement. It is fairly obvious that the bank will leave rates unchanged, but any shift in rhetoric would easily cause large price moves in the downtrodden Japanese Yen.

Pound Looks For Clues Of Another Hike
There were a number of second-rung indicators crowding the economic calendar last week – all having something to say about the economy’s strength. Among the more important ones were the Nationwide Consumer Confidence survey, the industrial production gauge and the trade balance. The sentiment report started the week off on a high note with a greater than expected rise. However, disappointments in both the visible trade account and the annual factory activity measure eroded a lot of the good will the currency found through fundamentals on Monday. At any rate, all the actual data took a backseat to event risk embedded in Thursday’s Bank of England rate decision. Speculation of an imminent rate hike had grown to a fever pitch though the weeks preceding the policy meeting. Traders only started to take the possibility of a 25 basis point hike seriously back in the middle of April when annual inflation printed a decade-high 3.1 percent pace, which in turn forced BoE Governor Mervyn King to pen a letter to Chancellor of the Exchequer Gordon Brown describing what he would do to rectify the situation. Since then, pricing in a quarter-point rate hike was the standard. As time passed, the possibility of a 50 basis point hike crept in and actually found a considerable following. Consequently, when the central bank lifted the overnight rate to 5.50 percent, disappointment ultimately resulted and GBPUSD crashed through 1.9850 support.

While last week’s tumble seems to have pulled GBPUSD below considerable support (which already proven itself new resistance), the pound may find its way back to 2.0 yet. Unlike last week, when the market was solely focused on one event for price action, the coming period is fully stocked with top quality indicators with no one report outshining the other. To be sure, each print may very well be interpreted for the same purpose – to gauge its contribution to squeezing out another 25 basis points from the BoE. It is an interesting coincidence then that the major theme of the week will be inflation. Two price gauges for the housing market are expected to fall back for their respective prints. Reading from another sector, the pass through on the factory level is also expected to slow. More importantly, the annual CPI and RPI measures – the indicators that reinvigorated the rate cycle – are projected to step back from their highs. If all of these projections prove true, it would to be hard to argue with the consistency of the deceleration and hopes of another hike would drop off considerably. When the inflation picture is confirmed, retail sales and the employment data will end things with a bang with both looking for improvements.

Swissie Starts Its Count Down To June Rate Hike
Naturally, the Swiss economic calendar went through another lull last week. There were only two indicators that caught the market’s eye: unemployment and the still-green SECO Consumer Climate index. The labor data dominated price action in the front end of the week. Markets proved they were unimpressed when the jobless rate passed the month unchanged in April at a yearly low of 2.9 percent. Going into the report, economists had actually predicted a contraction to 2.8 percent on a seasonally adjusted basis; but price action revealed traders were not too upset that the indicator had missed its benchmark. Balancing things out, the SECO sentiment indicator for the same period actually met forecasts to hit its highest level in six years. The increase was certainly facilitated by the same favorable employment data that was overlooked earlier in the week. And, in turn, this confidence report will feed into what really matters for to Swissie traders – interest rates.

Though the SNB policy meeting is still a month away, the currency market will likely see speculation build into the June 14th meeting. Recently, a 25 basis point hike for next month was fully priced into short-term interest rate futures. However, beyond the next meeting, certainty begins to falter. Under most circumstances, risk increases over time; and traders will use this week’s data to guide the outlook for the September policy meeting. Penciled into the docket is the retail sales figure for the year through March. Sizing the consensus of a modest slowing from 4.5 percent to 4.0 percent up to the standard volatility of this indicator, a surprise is almost guaranteed. At the same time, an unexpected print will not necessarily translate into price action. Instead, traders will be passively monitoring the gauge to see whether sales will be able to sustain their steady trend higher to provide a firm foundation for further rate hikes. So where will the real price action come from? The Swissie will most likely find its pace from carry trade flows. Playing the carry on the USDCHF may not be wise though, since the dollar has not been the recipient (or suffered from) carry trade flows recently. On the other hand, the crosses have seen more than their fair share of activity against the franc. For evidence, one need only look at GBPCHF, which plunged after the BoE raised rate only a quarter point instead of the 50 basis points some had expected. This is a prime example of rate expectations and the Swissie’s role in the mix.

Canadian Dollar Rejects Significant Resistance
The Loonie finished lower for the first week in eight, as wave of mediocre Canadian economic data allowed the US dollar to retrace lost ground against its northern neighbor. The USDCAD’s resilience above the key 1.1000 level may mark the start of a further short-term bounce, but Friday’s price action indicates that markets are not yet willing to press the pair above significant resistance at 1.1170. Weakness on the day’s Canadian labor market report was the culprit for the pair’s intraday tumble, but the Loonie’s close near pre-report levels suggests that traders have not sounded the alarms just yet. Taken into perspective, the 5.2k loss of Canadian jobs seems almost warranted after seven consecutive months of stronger-than-expected labor data. Canadian dollar bulls will look to shrug off the disappointing report and look to the coming week of significant economic data.

Notable event risk starts off on Tuesday morning, with a closely-followed Manufacturing Shipments report to shed light on the overall strength of the domestic export sector. Given that Canada is the most trade-dependent country of the G8, any surprises in the figure could certainly drive volatile moves in the CAD. Such event-linked price moves may pale in comparison through later releases, as significant Consumer Price Index and Retail Sales reports will be the clear highlights of the week. Due up first, the Bank of Canada Core CPI report will draw considerable attention from fixed income traders and drive expectations of the future of BoC monetary policy. An exceedingly high inflation print was a clear catalyst for the Loonie’s initial turn higher, and any surprises in the upcoming report could just as easily drive medium-term moves. Consensus forecasts show expectations of an unchanged Core measures, but the CAD will remain especially sensitive to large surprises to the downside in the central bank’s reported year-over-year figure. Bank of Canada officials target a core inflation rate below 2.0 percent, and a print below would definitely hurt market expectations of stable rates through the coming quarters. The next day’s retail sales report could likewise influence the BoC’s future monetary policy decisions—leaving considerable risks of a CAD drop (USDCAD gain) on a negative surprise.

Aussie Preparing To Take .8400 Once Again
The Australian dollar managed to stage a comeback last week, as better than expected economic data pushed AUDUSD back above 0.8300. Retail Sales printed a surprisingly strong 1.1 percent against estimates of a 0.5 percent gain. The figure also rose at the strongest annual pace since 2004, with all seven components of the index showing an increase. The release shows that consumer demand in Australia spurred by a very strong labor market and seemingly boundless appetite by China for the country’s mineral resources. Furthermore, the unemployment rate slipped to 4.4 percent – a 32-year low – against predictions of a steady 4.5 percent. With the Australian expansion remaining alive and well, policy tightening later in the year may not be entirely out of the question if we see price pressures start to pick up again. As Boris mentioned earlier in the week, “In short, only two weeks after disappointing inflation data soured sentiment on the Aussie, the currency is back in vogue by carry traders as the FX market once again begins to price in rate hikes that could take the yield on the unit to 6.50 percent.”

Though much of the biggest event risk for Aussie is now out of the way, the releases scheduled to hit over the course of the week could prove market moving if they deviate far from expectations. Home loans are anticipated to pick up significantly, as Australian interest rates have done little to quell demand for housing. Westpac consumer confidence could come under pressure, as households remain worried about future financial conditions. At the end of the week, quarterly and weekly wages hit the tape, though they are unlikely to provide much market movement despite anticipated gains, as first quarter CPI has already been released. In all, AUDUSD will likely dance to the US dollar’s tune, but given the prospects for economic expansion and rate hikes later in the year, Aussie’s bid tone could continue and take the currency up towards .8400.

Dour New Zealand Dollar Times Ahead?
Despite the fact that New Zealand now has one of the highest benchmark rates in the developed world, the nation’s currency has continued to ease back as it is starting to appear than economic expansion may be all downhill from here. Indeed, labor costs in the first quarter fell back more than anticipated, as the RBNZ’s monetary policy may have taken its toll much before the most recent hike to 7.75 percent. Moreover, a loosening of the labor market surely played into the decline in wage growth, as the unemployment rate during the same period rose to 3.8 percent. Furthermore, ANZ Business PMI for the month of April dwindled to 54.2 from a downwardly revised 56.8, as the outlook for the sector is turning darker. Not only will higher borrowing costs impede business growth, but the extreme value of the New Zealand dollar may steadily lead to a slowdown in exports. This has already been evidence by companies like Fisher & Paykel Appliances, as the seller of refrigerators and washing machines in Asia, Europe and the US has announced plans to close plants and shed workers.

Looking ahead, the New Zealand dollar could see more dour times, as fundamental data is anticipated to erode and highlight how the cooling effects of sky-high interest rates may be a far greater detriment to the economy than the RBNZ banked on. First, retail sales are anticipated to drop -0.2 percent in March after the figure showed a robust 1.9 percent increase the month prior. While it may have been necessary for the central bank to attempt to constrict booming consumption and credit growth, the retail sector will soon suffer. Later in the week, producer prices could continue to slip, but since CPI for the first quarter has already been released, the figure will be of little use to the markets. By the end of the week, it may become clearer that RBNZ Governor Alan Bollard knocked the ball out of the court by tightening policy, as the shift in rates could be a great demise for New Zealand and may potentially send NZDUSD down to 0.7200.

Boris Schlossberg is a Senior Currency Strategist at FXCM.