How to Trade the Dollar at these Pricey Levels

• How to Trade the Dollar at these Pricey Levels
• EUR: We're Not Worried About ECB
• CAD: What to Expect from Bank of Canada
• AUD: Hit Hard by Weak Chinese Trade
• NZD: Loses Approximately 1%
• GBP/USD Bounces Off Fresh Multiyear Lows

How to Trade the Dollar at these Pricey Levels

The U.S. dollar continued to trade higher against most of the major currencies and if you are currently long the dollar, you are happy with your existing positions. However if you missed buying the dollar when it dipped in late March / early April, you may be wondering if it is too late to jump in.  On a long term basis, we still expect the dollar to rise another 4 to 5 percent however on a short term basis, the dollar is overbought. The only problem is that when sentiment is so one sided, a currency can remain overbought or oversold for extended periods of time. With this in mind, there are at least 3 different ways to trade dollar depending upon your risk tolerance:

#1 Buy and Hold - The first way is to just buy the dollar now versus the euro, British pound or Australian dollar and aim for a 4 to 5 percent return. The problem with this strategy is that you may have to risk the same amount to avoid being stopped out. 

#2 Buy Ahead of Retail Sales - The second way to trade the dollar at these pricey levels is to trade it on a short term basis. U.S. retail sales are scheduled for release on Tuesday and chances are the number will be strong.  The International Council of Shopping Centers and Johnson Redbook have already reported a pickup in spending and with wages on the rise, retail sales should snap back strongly in March. A strong consumer spending report should compound the gains in the greenback and drive pairs like EUR/USD, GBP/USD and AUD/USD lower. One option would be to buy dollars right before the report with a tight stop and take profit on a bounce if the data is strong.

#3 Wait for a Retrace to Buy - While the smartest way to trade the dollar is to wait for a correction because that provides the best risk / reward the problem is that the dollar may not correct and you may miss the move.  Given the extent of long dollar positions in the market and the pace of the recent decline, we believe that the dollar will retrace, giving investors an opportunity to join the move at a more desirable level. It may not happen this week because retail sales and the Beige Book report will support the rally but there could be a pullback in the weeks ahead.

Regardless of how you trade the dollar, the uptrend should remain intact for some time and buying in the direction will still be the best trade.

EUR: We're Not Worried About ECB

Being short euros has paid off nicely with the currency rising against the U.S. dollar each of the last six trading days.  While no Eurozone economic reports were released this morning, ongoing concerns about Greece continue to weigh on the currency.  The most important event risk for the euro this week is the European Central Bank's monetary policy announcement.  The euro could remain weak going into the rate decision but we don't expect a big move in the currency on the back of Mario Draghi's press conference. Having just started buying bonds in March, no changes are expected from the central bank in April.  Instead, Mario Draghi will use this opportunity to talk about the positive impact that they have already seen from Quantitative Easing. Economic data has improved, the euro has fallen in value and bond yields have moved lower. The central bank bought approximately 60 billion euros worth of bonds last month with ease, and they don't anticipate having problems finding enough bonds to buy in the future.  In other words, Draghi will reassure the market that QE is off to a solid start. Of course, he will also remind us that monetary policy remains easy but with QE going well, there's no need for the central bank to upgrade its level of dovishness.  So while the euro may trade lower going into the meeting, it may not see additional losses.

CAD: What to Expect from Bank of Canada

All three of the commodity currencies traded lower against the greenback with the Australian and New Zealand dollars hit the hardest by shockingly weak Chinese data. China's trade surplus shrank to $3.06B in March from $60.62B in February. Double-digit declines were reported in both exports and imports which paints a grim outlook for the world's second largest economy and its trading partners.  Since trade is a key component of GDP, we are now looking at the strong possibility of Q1 GDP growth falling short of the government's 7% target.  GDP numbers are scheduled for release later this week.  We are now on PBoC rate cut watch but even easing from China may not help the Australian dollar avoid further losses. We'll discuss the outlook for AUD in detail later this week because for the next 24 hours the focus will be on the Canadian dollar.  The Bank of Canada has a monetary policy announcement and a small group believes that the central bank could cut interest rates. We don't think this is likely especially given the recent upside surprise in economic data. More than 28k jobs were created last month, housing starts are on the rise, house prices turned positive, the trade deficit narrowed and GDP growth contracted less than anticipated at the start of the year. In addition oil prices hstabilized around $50 a barrel. So while BoC Governor Poloz may be worried about the outlook for Canada's economy, there's not enough justification for a rate hike.  Steady rates and an unchanged outlook for the economy should lead to a mild pullback in USD/CAD.

GBP/USD Bounces Off Fresh Multiyear Lows

Having fallen to a fresh 4.5 year low versus the U.S. dollar during the early European trading session, sterling staged a strong recovery to end the day in positive territory.  No U.K. economic reports were released today but consumer prices are scheduled for release tomorrow. We have been looking for sterling to break the bottom of its recent range against the U.S. dollar but we did not anticipate the move happening so quickly. However now that a new 4.5 almost 5 year low has been set, bounces in the currency pair could be shallower.  Nonetheless, we believe investors should have the opportunity to sell sterling between 1.47 and 1.48 in the coming week for an eventual move below 1.45 on the back of the U.K. election.  Aside from U.S. data, U.K. inflation and employment numbers are also scheduled for release. While the PMIs reported mixed labor market activity with the rate of job creation accelerating in the service sector and slowing in manufacturing, inflationary pressures should remain weak.