US Dollar, Japanese Yen Experience Broad Declines; US Retail Sales Could Disappoint Today

04/14/2009 10:20 am EST

Focus: FOREX

The US dollar and Japanese yen fell sharply across the majors yesterday as lower liquidity contributed to especially choppy price action. The moves led currency pairs like GBP/USD and USD/CAD to break important levels, but looking to the US dollar index, price is still holding above rising trend line support, and as a result, there is still upside potential for the “safe haven” currency.

For readers looking to the next piece of US event risk, the Commerce Department is forecasted to report today that US retail sales rose 0.3% in March, after slipping 0.1% in February, and excluding autos retail sales, are anticipated to stagnate. However, there may be downside risks for this reading as the latest ICSC chain store sales numbers show that the contraction in consumption accelerated during March. Indeed, deteriorating labor markets, tight credit conditions, and a year-long recession weighs heavy on the minds of consumers, but as we’ve seen with reports like US non-farm payrolls, the impact of a disappointing result may be mixed as the Federal Reserve has already cut the Fed funds target to a record low range of 0.0% - 0.25 % and has no room to cut further. As a result, traders should keep risk trends in mind as flight-to-quality tends to benefit the US dollar, even if the US fundamental picture worsens.

Euro, Swiss Franc Attempt to Stage Recovery; Euro Zone CPI to Be Released on Thursday

The euro and Swiss franc were two of the strongest currencies on Monday, though the latter outpaced all of the majors, as they started to retrace some of their recent declines. Indeed, with many European markets closed, low volumes contributed to extremely choppy price action. Liquidity conditions should improve on Tuesday, but since there will be minimal event risk on hand for the European currencies, traders should keep an eye on broad US dollar trends.

There will be some downside risks for the euro on Thursday as Eurostat inflation estimates for the euro zone have shown that CPI may have fallen to a 0.6% annualized pace during March, which would mark the lowest since recordkeeping began in 1991. More importantly, though, the data would highlight that inflation remains well below the European Central Bank’s 2.0% inflation target. If Eurostat confirms this at 5:00 ET, or revises the results to the downside, the euro could pull back, especially since the markets are pricing in a small chance of a 25 basis point cut by the ECB on May 7. On the other hand, if CPI is higher than anticipated, the currency could gain as the markets will speculate that the central bank may pause in their efforts to make monetary policy more accommodative. Ultimately, there seems to be more evidence that the ECB will reduce rates at least one more time next month after the final reading of Q4 GDP was unexpectedly revised to a new record low of -1.6%. ECB Governing Council member George Provopoulos said that the bank’s benchmark rate could be cut by at least another 25 basis points, and as the ECB’s monthly bulletin highlighted their concerns about growth both domestically and abroad, as well as the potential for inflation figures to fall negative mid-year.

Commodity Dollars Hold Strong; New Zealand Dollar to Face Retail Sales

The commodity dollars generally made solid headway on Monday, but of them all, the Australian dollar dominated as AUD/USD reached a six-month high. Meanwhile, the Canadian dollar hit a two-month high versus the greenback, which may denote a breakout for the USD/CAD pair. The moves came amidst the release of the Bank of Canada’s business and senior loan officer surveys, which indicated that business sentiment and credit conditions improved slightly during Q1, but ultimately, both readings remain very close to the record lows reached in Q4, suggesting that the global economic slowdown and financial instability are still taking a toll.

The New Zealand dollar will face event risk tonight at 18:45 ET, as New Zealand retail sales will hit the wires. Sales are expected to have dropped 0.5% in February, which would mark the fifth straight month in which spending either contracted or stagnated. Such results will raise the odds that the Reserve Bank of New Zealand will cut rates again on April 29, as Credit Suisse overnight index swaps are pricing in a 25 basis point cut to 2.75%, while a Bloomberg News poll is calling for a 50 basis point reduction. Thus, there is potential for New Zealand dollar declines overnight, though they may only occur on a short-term basis, while surprisingly strong sales results could provide a boost to the currency.

British Pound Breaks Higher, Push Above 1.50 Could Come Next

The British pound broke from its tight range versus the US dollar of 1.4600-1.4750, thanks to broad declines in the greenback. The Bank of England’s rate decision last Thursday has led interest rate expectations for the UK to fall flat, as they left the bank rate at a record low of 0.50%, as expected. The BOE Monetary Policy Committee’s (MPC) statement was short and sweet, providing little in the way of new information. The MPC did indicate that they would continue with the quantitative easing efforts announced on March 5, but that it would take another two months before the program was completed because they had only purchased 26 billion pounds in assets of the planned total of 75 billion pounds. While there are still significant downside risks for the UK’s economy and financial system, the markets are anticipating that the BOE will continue to leave the bank rate at 0.50% throughout the remainder of the year, since further reductions are unlikely to have much of an impact. In the near-term, it may be worth looking for a GBP/USD break out of its recent range, but if risk aversion returns, the pair’s break could be a bearish one.

By Terri Belkas of

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