The Great Euro Short Squeeze Continues

• The Great Euro Short Squeeze Continues
• Dollar: Inflation vs. Jobs
• Sterling Marks its 8th Straight Day of Gains
• NZD Extends Gains Following Strong Spending
• CAD: House Price Growth Slows
• AUD Rally Fizzles

The Great Euro Short Squeeze Continues

Thin trading conditions create the perfect environment for a short squeeze in currencies but when combined with fundamental drivers, the move can last longer than many would anticipate.  Over the past month, EUR/USD climbed close to 900 pips with a third of those gains incurred over the past 2 weeks.  Unlike other currencies, which had seen major position adjustments in recent weeks, there were still significant EUR/USD short positions going into this new trading week.  As the disappointments in U.S. data continued to pour in, investors found less reason to remain short euros.  At the same time, stops were slowly being triggered, forcing other traders out of the market.  1.15 is the key level for the currency as we suspect that the majority of stops are sitting above that rate.  Europe still faces major political and economic challenges - Greece created more headaches for the region today after Finance Minister Varoufakis said he could ask for an emergency Eurogroup meeting to postpone their July and August debt repayments. We know that Greece is running out of cash fast and in 2 weeks time they will be at the brink of default again.  However the market had been positioning for a meltdown in Greece, ongoing weakness in Eurozone data and persistent strength in U.S. data for sometime so when the numbers started to surprise in the opposite direction, everyone began to question their views and some completely lost conviction as the EUR/USD continued to rise. There's no doubt that a weaker euro and Quantitative Easing from the ECB is helping Europe's economy but the currency pair is up 8.5% from its lows and there's bound be a reversal of influence if it remains near current levels.  For the time being the flows are still on the side of the euro as the shorts continue to be squeezed but today's performance, which left EUR/USD off its highs suggests that the rally has become overstretched and is beginning to lose momentum.

Dollar: Inflation vs. Jobs

The primary job of the Federal Reserve or most central banks for that matter is to maintain maximum employment and stable prices.  According to the latest economic reports, U.S. policymakers are doing a decent job with stimulating the labor market but deflation could be roaring its ugly head.  Jobless claims continued to fall with the 4 week moving average dropping to its lowest level in almost 15 years.  Producer price growth on the other hand turned negative, dropping 0.4% when economists had been looking for a 0.1% rise. Excluding food and energy costs, prices fell 0.2%. While progress on one part of their mandate is encouraging, the recent downturn in other U.S. economic reports and the decline in price pressures mean no rate hike in June.  We never expected the Fed to tighten next month but we were hoping that they would set the stage for a move in September.  However if data continues to miss, they may refrain from signaling a change in monetary policy 3 months forward.  As Fed President Williams suggested every meeting is in play and they could adjust the FOMC statement in July or August if the economy gains traction.  Rate hike expectations have shifted dramatically and  the market is now pricing in a greater than 50% chance of the first rate hike happening in December versus September.  While both of these meetings are months away, the Fed will want to preannounce the move to avoid a major reaction when rates are increased.  More U.S. data is scheduled for release on Friday and even if they surprise to the upside, we'll need to see a series of data improvements before the dollar regains its bid.

Sterling Marks its 8th Straight Day of Gains

Sterling traded higher versus the U.S. dollar for the eighth consecutive trading day, the longest stretch of uninterrupted gains since April 2012.  It is not often that we see such strong one way moves in a currency pair with virtually no retracement but in the past month, we the relentless strength of GBP/USD led to two of these type of moves.  While we have seen the rally last longer - in 2012, sterling did not top out until the move extended for 10 trading days, but 1.58 is an important resistance for the pair and we don't think that it is coincidence today's rally stopped right at that level.  The 38.2% Fibonacci retracement of the 2009 to 2014 rally sits right around 1.58 and this level also served as support turned resistance in November and December of last year.  With no U.K. economic reports were released today and nothing is scheduled for release tomorrow, today's move is clearly driven by ongoing dollar weakness.  However if next week's U.K. inflation and retail sales reports surprise to the upside, we could see GBP/USD hit 1.60.

NZD Extends Gains Following Strong Spending

There was very little consistency in the performance of the commodity currencies. The New Zealand dollar extended its gains, the Australian dollar ended the day lower after hitting fresh 3.5 month highs while the Canadian dollar ended the day unchanged versus the greenback. The chance of RBNZ easing in June fell further after New Zealand's retail sales report showed a significant pickup in first quarter spending.  According to the report, sales rose 2.7% in the first 3 months of the year, which was much stronger than anticipated and a healthy pickup from last months levels.  Manufacturing activity slowed but that seemed to matter little to NZD/USD bulls who focused on the positive consumer spending report.  While we believe that a RBNZ rate cut is still on the table this year especially since the PMI report is more current than retail sales, the earliest they will move is in July.  Meanwhile no economic reports were released from Australia but stagnant house price growth in Canada did not appear to have a significant impact on the currency.