Dollar Stronger Ahead of China-US Summit in Washington
With absolutely no economic data on the schedule, the US dollar showed unabashed strength throughout the day against the majors as indications emerged late last week that consumer confidence remained high and growth in the manufacturing sector was healthy. Furthermore, the G8 meeting of central bankers and finance ministers in Germany held over the weekend yielded no market moving commentary, as hedge fund regulation served as the dominant theme once again. Starting tomorrow, however, things could get a little more exciting for US dollar trade. First, it will be interesting to see if the People’s Bank of China’s decision to raise interest rates and widen the daily trading band for the yuan managed to placate US officials – at least temporarily – at the China-US economic summit in Washington that starts tomorrow. The action by the PBoC is unlikely to have had a large impact on Treasury Secretary Henry Paulson’s push for flexibility on the yuan, especially since the currency had never moved by the maximum amount allowed within the prior range of 0.3 percent, leaving little potential for a rapid appreciation of the Chinese currency. The other major event risk for the US this week is on Thursday, as Durable Goods are estimated to weaken during the month of April. While this is in and of itself bearish for the dollar, there is major downside potential for the release, especially the ex-transportation index, given the dismal Advance Retail Sales report for the same month. Add the atrocious April figures from retailers such as Wal-mart to the mix, and the outlook for the sector appears even drearier.

Euro: Will Sentiment Give Clues as to What the ECB Will Do Beyond June?
Similar to the US, an empty economic calendar and lack of G8 commentary provided little spark for euro trade, leaving the currency to saunter lower. A euro bid tone could re-emerge over the course of the week, though, as event risk out of the Euro-zone is filled with sentiment reports with the ZEW, IFO, and GfK surveys all scheduled to be released. The ZEW and IFO releases are both anticipated to reflect growing optimism amongst investors, as equity markets continue to reach new highs and businesses throughout the Euro-zone outperform. Meanwhile, consumers are forecasted to show more confidence in the economy in the GfK survey, as labor market conditions are perpetually improving. Nevertheless, hot inflation remains the key factor for European Central Bank policy decisions, so we will likely have to wait for Trichet’s commentary following the June 6th rate announcement for a more accurate gauge. Meanwhile in Switzerland, producer and import prices gained the most in 14 years in April, pointing to potentially higher CPI figures. Moreover, the KOF leading indicator is anticipated to be quite encouraging on Friday given the resilience of consumption and trade, and with the SNB stating their desire to continue normalizing rates, a strong KOF figure combined with mounting inflation may bring traders to price in a hike on June 14th.

British Pound: Mixed Data Leaves Sterling Slightly Lower
The British pound remained under selling pressure following the release of less than exemplary housing data in the overnight. According to the industry survey published by Rightmove, home prices rose 0.4 percent, the slowest since December of last year and less than consensus expectations. Subsequently, the smaller than expected rise helped to pull the annualized figure lower to 13.1 percent from the previously bullish 15 percent just a month ago. Although still relatively positive for the UK economy, the figures reflect a potential soft patch in the otherwise bullish real estate sector. Similar reflections were also pinpointed in recent surveys, showing that demand was waning slightly as supply has incrementally crept higher. However, money supply figures continue to suggest inflationary pressures remain, keeping some of the more bullish sterling players in the market and propping the currency above the 1.9700 figure. The latter will keep the market focus turned to this week’s release of the Bank of England meeting minutes. But should solidarity be lost through a lone dissenter, it may continue the downward directional bias for the sterling in the near term.

Japanese Yen: Traders Still Ahead of Meeting Minutes Release
In similar fashion to the British pound, traders are focusing their attention on the release of the Bank of Japan meeting minutes. With all the hype surrounding carry trade speculation, short yen traders will surely be scrutinizing for any further indications of a pre-emptive move on inflationary pressures in the world’s second largest economy. Although the potential does remain, the likelihood continues to be a far off scenario as policy makers have little to go on as far as a definitive move towards monetary tightening. Domestic spending, although improving, remains in the cellar for the Japanese economy, helping to keep consumer prices lower in the face of rising global oil prices. With growth also lower than expected, marking at 2.4 percent against expectations of a repeat 5 percent from the year before, policy makers are sure to keep a higher interest rate in the back of their minds, at least for now. The notion should keep the yen moving lower against higher yielders, including the US dollar, barring any liquidation in Shanghai.

Canadian Dollar Momentum Continues, Pushes USDCAD Below 1.0950
Canadian dollar was big news on the day as the underlying currency strengthened against the US dollar in the London and New York session. Both Aussie and Kiwi remained in relatively the same ranges from last week, priced at 0.8217 and 0.7295 respectively. Dropping through the 1.0950 figure, the USDCAD currency pair was able to plummet through to trade to a 30-year low of 1.0825 over the last 24 hours. Although warranting plenty of intraday attention, the move wasn’t that much of a surprise as price action was a simple reflection of further momentum stemming from Friday’s surprising retail sales figures. A recap, for the month of March, retail sales in the world’s ninth largest economy advanced by an impressive 1.9 percent, over consensus figures of a 0.8 percent advance. Incidentally, along with other economic data over the past couple of months, speculation is now mounting on the possibility of rate increases on the horizon.

Richard Lee is a Currency Strategist at FXCM.