Dollar: One More Day of Consolidation Before Crazy Week

• Dollar: One More Day of Consolidation Before Crazy Week
• Sterling Extends Losses Ahead of Retail Sales
• Stronger German IFO Keeps EUR Above 1.38
• NZD Erases Post RBNZ Gains
• CAD: Carney Talks Export Strength and Vulnerability
• AUD: Extends Decline Despite Rebound in Gold
• JPY: Talk of Possible GDP Downgrade

Dollar: One More Day of Consolidation Before Crazy Week

The U.S. dollar traded lower against all most of the major currencies today despite relatively healthy economic data. Durable goods rose 2.6% in the month of March, the largest increase since November.  Excluding transportation orders which can be volatile, bookings for products made to last 3 years or more rose 2%, which was significantly stronger than the 0.6% forecast.  These numbers reflect new momentum in the manufacturing sector and the possibility of stronger growth in the second quarter as businesses increase investment.  Although jobless claims rose to 329k from 304k, the 4-week moving average remains at a relatively low 317k.  Given the sharp improvement the previous week that took the average down to its lowest level since 2007, an increase in jobless claims was widely expected.  At the same time, most of this month's reports are distorted by the Passover and Easter holidays.  The U.S. dollar received very little support from this week's better than expected economic reports and the decline in yields confirm that investors don't believe that any recent economic reports will alter the Federal Reserve's accommodative monetary policy stance. While there is one more piece of data scheduled for release tomorrow - revisions to the University of Michigan's consumer sentiment survey, we don't expect this report to have a significant impact on the greenback although an upward revision would suggest a further improvement in the unemployment rate. At the end of the day, there has been very little volatility in the dollar over the past week which traded within a tight 75 pip range versus the euro, 63 pip range versus the Japanese Yen and 77 pip range versus the British pound.  However that will change in the coming week with first quarter GDP, ISM, FOMC Rate decision and non-farm payrolls scheduled for release. 

Sterling Extends Losses Ahead of Retail Sales

The British pound rebounded ahead of Friday's retail sales report.  According to the Confederation of British Industry, retail sales rebounded strongly in the month of April thanks to spending over the Easter holiday.  The index rose to its highest level since February with expectations for the following month hitting its strongest level since December 2010.  Unfortunately tomorrow's retail sales report is for March and not April and this survey along with BRC retail sales monitor reported a steep decline in spending in March.  So while sterling refuses to fall, if consumer spending drops more than expected, it could trigger a quick and aggressive sell-off in GBP/USD.  With long GBP/USD positions at an extreme level, it may not take much to trigger profit taking. We already know that the central bank is in no rush to tighten monetary policy and their case for keeping the current level of stimulus in place would be supported by a weaker retail sales report. However if retail sales surprises to the upside or comes out in line, traders will look at the CBI number as a sign that demand recovered in April which would help sterling hold onto its gains and maybe even rise to new 4 year highs.

Stronger German IFO Keeps EUR Above 1.38

While the European Central Bank is prepared to use all conventional and unconventional measures to avoid a long period of low inflation, as long as Eurozone economic data continues to surprise to the upside, the central bank will keep monetary policy steady.  This week's stronger than expected Eurozone PMI numbers were followed by a rise in the German IFO report this morning.  Economists anticipated a decline but the German IFO index climbed to 111.2 from 110.7 in the month of April.  As our colleague Boris Schlossberg noted,  "German businesses are clearly not being affected by the geopolitical tensions in the region. According to IFO economist Klaus Wohlrabe positive fundamental mood prevailed in Germany and orders were full, with exports doing well and capital goods sector performing especially strongly. There was just a minor decline in current conditions dropping to 115.3 versus 115.7 forecast. Overall this was a solid report and was just another data point to convince the market that the ECB is likely to remain stationary at its next meeting in May." ECB President Mario Draghi also spoke this morning but said nothing new.  Aside from outlining all of the ways the ECB could increase stimulus, he said the central bank does not target the exchange rate but if a strong euro tightens overall financial conditions, they could ease - a comment that he has made before.
 

NZD Erases Post RBNZ Gains

The New Zealand dollar erased all of its post RBNZ gains during the European trading session. While FX traders in Asia were attracted to the increase in yields and encouraged by the central bank's concerns about inflation, European traders interpreted the central bank's monetary policy statement in a very different way.  They latched onto the conditions for additional tightening and instead of bidding up the currency, took it as a reason to take profits on their long NZD/USD positions. The takeaways from the RBNZ meeting remain the same but given some time to digest the central bank statement, more traders are starting to believe that a June rate hike is not a done deal.  There's no question that the changes in the monetary policy statement has given the RBNZ more flexibility but prices would need to fall further for the central bank to pause their tightening cycle.  However the mere possibility that the central bank could hold rates steady at their next meeting was enough to trigger profit taking and unfortunately when traders unwind their positions, it is rarely a one-day move.  Keep an eye on NZD bill rates because they will tell us how bond investors are adjusting expectations.  Meanwhile despite a spike in gold prices, the Australian dollar also ended the day lower against the greenback.  The Canadian dollar on the other hand ended the day unchanged. No data was released but Bank of Canada Governor Poloz talked about which exports are poised for recovery and which are vulnerable to further weakness. There are no major economic reports scheduled for release from New Zealand, Australia or Canada over the next 24 hours.

JPY: Talk of Possible GDP Downgrade

The sell-off in USD/JPY and the weakness in commodity currencies drove all of the Japanese Yen crosses lower today.  While the declines can be primarily attributed to the continued slide in Treasury yields, talk of a possible downgrade to 2013 and 2014 Bank of Japan GDP forecasts certainly did not help and even contributed to the slide in the Nikkei. According to Sankei newspaper in Japan, weaker than expected first quarter exports will prompt a downward revision to the central bank's GDP forecasts.  Unfortunately with BoJ officials squarely focused on the impact of the sales tax increase on consumer demand, these revisions are not expected to have a significant impact on monetary policy.  Central bank officials have made it clear that if they choose to increase stimulus it will be driven by weakness in retail sales and/or inflation.  Japan's latest consumer price report is scheduled for release this evening and inflation is expected to make further progress towards the BoJ's 2% target.  As of February, CPI was growing at an annualized rate of 1.5% and in March it is expected to accelerate to 1.6%. With no major economic reports scheduled for release on Friday from the U.S. or Japan, the Yen crosses are vulnerable to a deeper correction.