The $1.20 pullback in oil is keeping any euro advances in check near the $1.55 figure. Currency markets will take this week’s busy schedule of U.S. economic reports as the first tangible basis of whether the dollar recovery is warranted by improved U.S. economic data rather than negative reports from the Euro zone or interim pullbacks in oil. Tuesday’s release of U.S. retail sales is expected to show a 0.2% decline last month. A figure at or above zero coupled with CPI above 0.2% on Tuesday is likely to strengthen the dollar’s tone, especially against the yen and the pound. But traders will have to wait for “super data Thursday” for jobless claims, Empire manufacturing, industrial production and Philly Fed survey.
We reiterate that the current dollar rally is expected to maintain EUR/USD at $1.5250-1.5550 until any deteriorating weakness in the Euro zone breaks on the downside, or renewed strength (also from the Euro zone) supports the currency higher. We do not anticipate stronger than expected U.S. data alone can trigger any prolonged euro selling due to
the continued mixed signals emitted from the broader U.S. reports (ISM, payrolls and unemployment rate, construction spending and home sales); and
the unambiguously hakiwsh ECB stance confirmed at last week's press conference. Upside moves seen running out of steam at 1.5530, while support is found holding at 1.5410 and 1.5380.
Sterling’s inflated on record PPI
Sterling rallied on the highest PPI reading on record, setting aside the string of negative economic data of the past two weeks. PPI rose 2.4% in April m/m 23.1% y/y, lifting the pound on expectations that Tuesday’s CPI release will grow more than 2.5% annual rate registered in March. Further strength in the pound is to run on the argument that a potential pause by the Bank of England next month would stabilize the interest rate erosion sustained by the currency, but the negative macro dynamics supporting further easing are expected to cease the day. Although rising inflation is supposed to act as an obstacle for the anticipated May interest rate cut from the Bank of England, we do not regard these inflation figures as a tangible positive for the currency. Thus, at a time when most fundamental reports from the UK are pointing to deepening weakness, ranging from housing, industrial production, services and construction, the positive currency impact from high inflation may be seen as a trap for the bulls.
Sterling rallied from a fresh 2 ½ month low of $1.9444 to $1.9603 and is expected to test fresh one-week highs near the $1.9630s. Further upside may extend towards $1.9680, ahead of tomorrow’s April CPI, expected up 2.6% y/y from 2.5% y/y. Selling interest is seen below $1.97 at which point the pair is to head back towards the $1.9530 and $1.95.
USD/JPY recovery unlikely past 104.20
As spectacular as the rally in the yen pairs is proving today, we deem the current moves as an opportune occasion for risk appetite to show some life during a relatively inactive Monday session. The 250-point jump in USD/JPY shows to have recovered all of Friday’s declines, but we expect the rally to taper off at 104, with solid pressure imposing at 104.20-25.
News just released that Merrill lynch will take another $5.2 billion write-down and MBIA releasing an earnings loss twice as expectations may thwart risk appetite anew and drag the pair lower. We remain skeptical with any follow-up in yen selling in light of our expectations of fresh retreat in risk appetite. Interim downside stands at 103.50, followed by 103.20.
Kiwi loses its taste as home sales tumble 46%
The high yielding currency of New Zealand was shaken off by another dismal economic report, this time showing house sales falling 13% in the month ending in April, translating into a 45.5% annual decline. March annual sales fell by 53%. Last week’s report showing Q1 employment dropping 1.3% – the biggest in nearly two decades – has tipped the expectations pendulum into the favor of an easing monetary policy. The RBNZ has not cut interest rates since April 2003, when rates were reduced to 5.25%. Since then, rates were hiked by 300-bps to encounter dairy inflation and booming real estate market. While markets have witnessed the unwinding of carry trades mainly from USD and GBP into JPY and CHF, the unwinding of the high yielding NZD is likely to be violent across the board, particularly versus JPY and USD. The other catalyst that could trigger sharp declines may emerge from global equities as such developments have consistently proven negative for the Kiwi.
Although NZDUSD rallied to 0.77 in thin Asian and European trade, we expect the pair to return towards the 0.7660s, followed by 0.7630. This also means the currency will find a similar downward trajectory against the EUR, JPY and AUD.
Loonie to lose ground on oil, risk appetite
Loonie extends strength despite prolonged selling in oil. Canada’s New Housing Price Index showed a 0.2% rise in March in line with expectations. Last week’s stronger than expected jobs report and higher than expected trade surplus boosted the CAD across the board, but currency players are well aware of the Bank of Canada’s intentions to cut interest rates by at least 25 bps before the end of the quarter. USD/CAD downside seen holding at 1.0035, but we warn that the news just released about Merrill lynch taking another $5.2 billion write-down and MBIA releasing an earnings loss twice as expectations may thwart risk appetite anew and lift USD/CAD. We expect a rebound back to 1.0060 followed by 1.0080.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
