USD/JPY Hits 1 Month High but Can the Rally Last?

Many of the major currencies traded higher today including USD/JPY, which climbed to a 1 month high.   Geopolitical tensions rocked the FX market at the start of the week but by the end, President Trump toned down his rhetoric on China, asked his advisors to look into rejoining the Trans Pacific Partnership, talked about how they are close to reaching a NAFTA deal and made no decision on attacking Syria. As a result, USD/JPY and many of the other risk currencies responded positively. Although USD/JPY pulled back from its high by the end of the NY session, the breakout could be sustained if Monday'sretail sales report surprises to the upside because U.S. data hasn't been terrible. Many foreign investors have little interest in owning U.S. dollars but U.S. data hasn't been terrible. Consumer prices fell in the month of March but excluding food and energy costs, annualized CPI growth actually rose to 2.4% from 2%. Real average weekly earnings also increased, paving the way for stronger spending numbers next week.   Retail sales are the most important release on the U.S. calendar and based on the uptick in wages and rise in gas prices, we look forward to a stronger spending report. An uptick in retail sales would reinforce the hawkish tone of the FOMC minutes. Unless Trump doubles down on trade or Syria, investors could finally turn their eyes to data. Technically, as long as USD/JPY doesn't fall back below 106.50, we could still see a move to 108.

Meanwhile softer data and cautionary comments from the European Central Bank made it difficult for euro to hold onto its gains this past week. At the same time, losses have been limited by the positive comments from Draghi and ECB member Nowtony. In the week ahead, the market's appetite for U.S. dollars should have a greater impact on EUR/USD than EZ data as the German ZEW survey of investor confidence is the only piece of meaningful data on the Eurozone calendar.   Technically, EUR/USD is flirting with the 50-day SMA and is therefore still vulnerable to a deeper decline towards 1.22.

Sterling has been one of the most resilient currencies, rising within a few pips of 1.43 on Friday. Six days have now past without a pullback in GBP/USD. Whether the rally extends its gains or fizzles out hinges upon next week's busy U.K. calendar. Recent data has taken a turn for the worse so investors will be looking to see if there were any improvements in the upcoming retail sales, employment and inflation reports. We know that the U.K. policy makers are hawkish and that the BoE will most likely be the next major central bank to raise interest rates. Recent data hasn't supported these views yet sterling still managed to rally. So if next week's economic reports improve, validating the central bank's optimism, we could see an even stronger move in the currency.

After selling off aggressively in the front of the week, USD/CAD rebounded as it became clear that no deal will be made at the NAFTA summit in Peru. According to President Trump, a deal is close and the U.S. concession on regional auto content puts them one step closer to an agreement. Mexico thinks a deal will be made in May but a preliminary agreement could happen sooner. This means USD/CAD is still a sell on rallies especially between 1.2650 and 1.2700. The Canadian dollar will be in play next week with a Bank of Canada meeting on the calendar. No changes are expected but there could be a tinge of optimism. The last time they met, the monetary policy statement contained a more cautious tone with the BoC expressing concerns about lower wage and household credit growth. Since then, oil prices hit a 3 year high, retail sales rebounded and job growth accelerated. With a NAFTA imminent, the BoC has less to worry about which could foster optimism from the central bank.

The New Zealand dollar retreated on Friday while the Australian dollar traded higher. Investors shrugged off China's weaker trade numbers, chalking up the disappointment to lunar New Year distortions. NZD was subjected to end of week profit taking and a softer PMI manufacturing report while AUD broke out because trade tensions eased. Looking ahead, the minutes from the last RBA meeting and Australian employment numbers are scheduled for release next week. We don't expect any fireworks from the RBA because they remained firmly neutral at their last meeting but Australian labor data should be stronger according to the manufacturing and services PMI reports. AUD/USD and NZD/USD retreated from key levels on Friday and could see additional profit taking in the front of the week.