Dollar Grinds Higher- Does it Have More Left?
The EURUSD continues to bounce within the well established 1.3650-1.3400 range but the bias had clearly been to the dollar long side for most of the week as US data demonstrated surprising resilience. Both Durable Goods Ex-Transport and New Homes sales beat expectations with the later showing the largest 1 month jump in 14 years. A day later however, the market saw a completely different story as Existing Home Sales dropped below the psychologically key 6MM barrier recording their worst showing in 4 years.

The housing data clearly put the crimp into the dollar rally as the bears arguments regarding the slow motion housing crash appeared to have merit. As our colleague Kathy Lien pointed out after the New Homes Sales data, “Even though new home sales jumped 16 percent in the month of April, the biggest rise in 14 years, the median price of homes dropped 10.9 percent, the largest on record. This means that builders, especially corporate ones are in a rush to recoup their investments by having a fire sale on inventory.” The far more price sensitive retail sellers in the Existing Home sector refused to slash prices and sales clearly suffered.

Given the fact that Existing Home Sales is a far larger market than New Home Sales, Friday’s news was clearly dollar bearish. However, the response in the EURUSD was relatively muted, as traders looked ahead to next week’s key labor market data. Indeed healthy employment results will be crucial to supporting the dollar long thesis. The markets expect 140K print – far better than the 80K reading last month. The strong weekly jobless claims numbers last month offer support for a good NFP number. However, if the NFP’s once again drop below the 100K level, the fallout is likely to be much more severe, as the few weeks respite in the dollar sell-off will come an end with traders once again becoming concerned about the prospect of a US recession in the second half of the year .

Will German Employment Put a Fire Under Euro?
The euro ended last week mildly lower, as economic data out of Germany failed to attract new buyers. The final reading of first quarter GDP in the Euro-zone’s largest economy went unchanged at 3.6 percent, and while this reiterates the resilience of expansion in the region, the figures did not sway expectations for the European Central Bank. Even mounting optimism amongst German investors and consumers proved lackluster for EURUSD. With a June hike essentially guaranteed after ECB President Jean-Claude Trichet brought back the phrase “strong vigilance”, markets are simply trying to figure out the central bank’s next move. However, the decision to raise rates beyond June will be largely dependent upon inflation data, and until we have confirmation that the ECB will maintain their hawkish bias, EURUSD could continue to suffer, albeit at a snail’s pace.

Event risk out of the Euro-zone will be scattered over the course of the next week, as figures in line with expectations aren’t likely to shake up the euro. On Tuesday, traders will be looking at German CPI for the month of May to gauge inflation for the Euro-zone as a whole, which will be released on Thursday. However, if there is little change in the German CPI report, market reaction could be limited since a June hike by the ECB is already priced in. M3 money supply for the Euro-zone will be similar to the CPI release in that the event may only prove market moving if we see a large deviation from the previous release. Regardless, the figure will garner attention since money supply has been cited by many central banks as creating upside risks for inflation. German labor market reports, which have been improving by leaps and bounds over the past few months, are anticipated to tighten once again and underpin growth in the Euro-zone throughout the second quarter. Finally, German retail sales are anticipated to ease back, but report tends to be highly volatile, limiting itself as a leading indicator for Euro-zone retail sales. With event risk weighted far more to the US side of EUR/USD, trading of the pair will likely be on the dollar’s whim.

Yen – Where is the Turn?
On Friday we wrote, “Calling a turn in pair has been a sucker bet over the past few weeks as Japanese fundamental data has failed to offer any support to the currency. Tonight was no exception as the best thing that could be said about the Japanese inflation data is that it did not decline on the core basis. Prices did fall at a slower pace signaling that deflation has bottomed out, but so far the indexes have offered scant evidence of rising prices. The report was especially surprising given the fact CGPI index earlier in the month recorded very strong gains of 0.6%.

Ultimately however, Japanese monetary policy is much more likely to be driven by the consumer spending data, rather than the CPI readings. BOJ officials recognize the necessity to raise rates in order to protect the yen from the incessant selling of the carry traders, but are constrained in doing so until Japanese wages and spending picks up. To that end next week labor market data and the Household spending reports may be crucial in providing clues for the timing of the next hike.”

Next week will indeed bring the employment and the spending data back to the forefront of the market as traders will try to gauge the true extent of the Japanese consumer demand. Some upside surprises could finally put the bid back in the yen, but if the data continues to disappoint the 122.00 and beyond could well be the reality for USDJPY.

Pound Bid Could Be Lost As Traders Pare Back BOE Expectations
The British Pound showed sharp gains in the middle of last week, as traders were caught off-guard by the minutes of the most recent Bank of England policy meeting. After CPI breached 3.0 percent, it was completely expected that the decision to hike rates to 5.50 percent was a unanimous one, however, markets were not quite prepared to find that the central bankers had actually discussed raising rates a full 50 basis points. This unexpected hawkishness led GBPUSD to surge more than 150 points over the course of the day, but the detail that must be considered is the fact that the BOE only took rate 25 basis points higher in order to allow more time to gauge the effects of previous policy tightening on the economy. As a result, there is almost no chance that the BOE will go to 5.75 percent in June, and perhaps not even in July. We believe that the Bank will want to see how CPI fares over the next few months and will go on to hike in August, barring a sharp drop in inflation pressures.

Looking ahead to this week, fundamental risk from the UK will be at a minimum with no first-tier reports on tap. However, with almost every indicator due to ease back, traders could sap some of Cable’s bid tone. GfK consumer confidence is predicted to slip to -7 from -6 as persistent inflation and rising interest rates have put a dent in sentiment. Nationwide house prices are also on tap, and the figure could help confirm or negate recent signals that sky high property values and increased borrowing costs are finally taking a toll on demand. Finally, PMI manufacturing is expected to ease back very slightly, but should still reflect strength in the slowly recovering sector. Without fundamental reports available to keep speculation of further BOE tightening afloat, GBPUSD will likely end the week closer to 1.9750.

Swissie KOF Misses the Mark
Switzerland's most important economic report - the KOF index of leading economic indicators - printed in-line with expectations at 1.96, higher than the 1.90 reading the month prior, but failed to reach the physiologically key 2.00 mark. As such it failed to deliver the knock out punch for Swissie bulls who hoped that a 2.0 number would assure the market that the SNB will hike rates to by 50bp instead of 25bp at its upcoming meeting in June. In the aftermath of the report EURCHF traded back above the 1.6500 level as the lack of an upside surprise clearly blunted the franc rally that has been developing over the past few days.

Next week, event risk in Switzerland will continue with Trade Balance, GDP and CPI data all on tap. Despite the disappointment late last week, the SNB posture remains resolutely hawkish as the quarterly meeting approaches, and the possibility of a 50bp hike is quite real. It will become even more so, if the CPI data prints hotter than expected. Given the rise in energy prices and the weakening franc a stronger than 0.2% reading is easily imaginable. In short, the franc rally may have had a false start last week, but fundamentals continue to point lower EURCHF in the near future.

Canadian Dollar’s Clear View of Parity May Cloud on Data Flow
Another weak and another high for the Canadian dollar. When USDCAD cleared 1.0925 support on the Friday before last, it symbolically opened the door to the remaining skeptics to join the bullish masses. The momentum behind the currency was so powerful in fact, that the additional 140 points won against the benchmark greenback was accomplished with nary a top-market moving indicator. The sole report on the entire economic calendar last week was Statistics Canada’s Leading Indicators Index for April. A mix of ten carefully chosen components that aims to fully cover the economy and forecast growth six to nine months down the road, the reading for last month hit the wires with a 0.4 percent print that repeated the pace from March. Breaking the headline number down into its various sub-gauges, it was clear that domestic spending was carrying the optimistic outlook for the entire economy. The new orders for durable goods component threw its weight around with a 0.9 percent rise, while a 0.7 percent pick up in furniture and appliance sales backed it up. Another generous contributor was the S&P/TSX Composite stock index, which rose 1.9 percent in notional terms and contributed a 1.0 percent rise for the indicator. Under normal circumstances, this index would be overlooked. However, this time around, there was a quarterly GDP report in the wings to quickly verify the leading indicators forecasting ability.

Next week, the Canadian dollar will be inundated with economic data and events to process. The action will begin on Tuesday with the only ‘event’ for the week – the Bank of Canada’s decision on interest rates. According to the consensus among economists, this meeting will end the same way the previous seven gatherings have concluded – with a pass. The market would disagree though. Looking at futures linked to short-term interest rates, there is a generous probability of a 25 basis point rate hike. Looking to the data to garner a more objective view of this BoC meeting, the support seems to be there for a boost to the benchmark lending rate should policy makers feel particularly hawkish. However, there are few indications of such a hawkish turn in sentiment to base this notion upon. With this in mind, a pass could be considered a let down for FX traders who are favoring a move this week. What’s certain though, if there is a hike, it would certainly give the Canadian dollar a good reason to rally across the board. Should the rate decision fail to generate heat, the GDP numbers due two day’s later could salvage the week. Annualized growth through the first three months of the year is expected to have surged to a one-year high 3.6 percent pace. Conversely, this too sets the bar high, and a miss could trip up the Loonie, especially when it seems over-extended.

Waning Bullishness May See the Aussie Break Recent Lows
The Australian Dollar finished lower for the second week in a row, as falling commodity prices and global equity market tumbles hurt the attractiveness of the Asia-Pacific currency. A virtually empty calendar did little to stem declines, with this week’s CFTC Commitment of Traders report showing that net speculative Aussie longs reached their lowest since March. Such an unwind of pent up AUDUSD demand shows few signs of slowing through the coming weeks of trade, leaving a decidedly bearish tone for medium term price action. According to our Technical Analyst Jamie Saettele, a hold below 0.8265 will leave the pair to test a key Fibonacci retracement at 0.8118. (See full technicals report here) Of course, the performance of key global equity and commodity markets will play a role whether or not the declines come to bear, with key mid-week data to likewise guide short-term Aussie price action.

Analysts predict that the coming week’s Retail Sales number will show consumers spent 0.5 percent more on Retail Goods through the month of April—less than half of their March pace. Yet we have seen many consumer demand-linked reports surprise significantly to the topside through previous months as economic prospects remain robust in the domestic economy. Interest rate expectations hinge on the future of labor and spending, leaving considerable event risk around the Retail Sales print. The next day’s Trade Balance figures likewise promise volatility across AUD-denominated pairs; expectations of a sharp drop in the deficit may support the Aussie ahead of the news. But all of this may come to nothing if risky assets continue to tumble through the same period. Namely, the US and Asia-Pacific stock markets must rebound from the week’s declines and metals must retrace losses if the AUDUSD is to bounce from recent lows.

New Zealand Dollar to Move Slowly Ahead of Next Week’s RBNZ
The New Zealand dollar saw itself mimic moves in its Australian counterpart, dropping for the third week of the past four. Much like the Aussie, the Kiwi fell as international speculators scaled back exposure to risky asset classes. Given a midweek tumble in US and Asia/Pac equities, the NZD instantly lost bullish momentum that looked to challenge the previous week’s close. This likewise coincided with a paring of NZDUSD longs, as CFTC Commitment of Traders data shows net speculative positions dropped from a positive 19,239 to 15,807 on the week. Nevertheless, traders remain quite heavily one-sided on the Kiwi, hurting potential for any further advances.

A relatively empty economic calendar will likely leave the currency to the will of broader financial markets, with the Kiwi to remain particularly sensitive to the performance of risky asset classes and agricultural commodity prices. An early-week Building Permits report is unlikely to draw significant forex trader interest, but risks remain for a significant surprise in either direction to force similar moves in the NZDUSD. The following NBNZ Business Confidence report is likewise doubtful to spark volatile price moves. Economists expect that Business Confidence will remain low on an exceedingly high NZD exchange rate and the prospects of higher interest rates through the medium term. The Kiwi may in fact remain in a range ahead of the following week’s key news event—the RBNZ Official Cash Rate announcement.

Boris Schlossberg is a Senior Currency Strategist at FXCM.