Highlights
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US 1Q GDP disappoints, but inflation pressures rise |
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EUR and GBP unable to extend gains, rally stalling |
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Japan's Golden Week holidays may trigger further JPY selling |
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US April NFP jobs report on Friday |
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Commentary
Brian Dolan, Chief Currency Strategist
Another bad week for the US dollar, or was it a bad week for the Euro? The dollar remains under pressure, along with the JPY on the crosses, but European currencies are having difficulty extending their gains. And all this in a week where US data was mostly negative, culminating in the US advance 1Q GDP coming in below expectations at a 1.26% seasonally adjusted annual rate. If the market is unable to send the dollar lower after mostly deteriorating US data confirms the market's negativity, what's it going to take for the dollar to see further weakness? More likely than not, a shake out of short-US dollar/long Europe positions will be needed before the dollar can begin softening again.
I'm seeing several technical indications that a short-term correction is building, with momentum readings continuing to stall and candlesticks patterns indicating the recent EUR/USD uptrend is pausing at the minimum. Trendline support to keep the move going higher has become very steep and is in danger of being broken on the next decline under 1.3600. The overhang of long positions in EUR/USD, GBP/USD, AUD/USD, and short USD/CAD positions continues to persist, and this also suggests a market vulnerable to a position-based shake-out. In terms of price levels, weakness below 1.3600 targets an initial decline to 1.3560/70, with scope to test overall upchannel support currently at 1.3500.
I'm not sure what the catalyst will ultimately be for a correction higher in the USD dollar vs. Europe. It could be a break to the upside in USD/JPY if it's suddenly able to take out the 120 level during the Golden Week holidays in Japan, which is entirely feasible in light of the renewed deflationary pressures reported out of Japan this week. Or it could be a more vocal repetition by US Treasury Sec. Paulson that the US wants a stronger US dollar. Eurozone officials seem to be cheering the Euro on higher, but that may change on short notice, especially as EUR/USD draws closer to 1.40. But I'd prefer to step back and trade the market from the short-EUR/USD side, and only look to re-establish EUR/USD longs on a pullback to the 1.3370-3450 area.
For next week, I'm also going to be watching what US bond yields do, since Friday's 1Q GDP report showed an acceleration in inflationary pressures, largely offsetting the negative growth reading. The result may be a further recalculation of US interest rate expectations. US rates may increasingly be seen to have the potential to move higher, especially as the market is being reminded of an expected 2H pick-up in overall US activity. US 10 year yields over 4.75/76 set up a break of recent highs and could prompt a larger move higher in US Treasury yields.
Turning to next week's data and events, be on the lookout for G7 comments in the second half of next week as G7 deputies begin to meet for planning of the G8 summit in June.
Data out of the US starts on Monday, the last trading day of April, with March personal income and spending, core PCE inflation and the Chicago purchasing managers report. If the core PCE moderates as expected, it might cancel out the concerns raised by Friday's GDP inflation readings, and see US yields and the dollar resume falling. On Tuesday, March pending home sales and the ISM manufacturing and prices paid reports are scheduled. On Wednesday, the ADP national employment report will be used to revise expectations for Friday's NFP report. On Thursday, weekly jobless claims and 1Q unit labor costs will be issued. And Friday sees' the April NFP report with expectations currently centered on a +100K jobs number and a tick up in the unemployment rate to 4.5%. US speakers of note include Fed chair Bernanke on free trade on Tuesday and Tsy. Sec Paulson on China issues on Wednesday.
Eurozone data begins on Monday with March German retail sales, April Eurozone confidence surveys, and the April IFO for Germany. Tuesday is May Day and no data of significance is scheduled. Wednesday sees April German unemployment and April PMI manufacturing sentiment for Germany and the Eurozone. Thursday sees March Eurozone PPI. Friday sees additional April Eurozone PMI surveys of service sector confidence.
Japan will essentially be out on holiday next week for the series of national holidays known as Golden Week. Japanese data is limited to Wednesday afternoon Tokyo time, when March labor cash and overtime earnings are reported.
UK data sees the April GfK confidence on Monday, the CBI retail sales and money supply reports on Wednesday, followed by a speech by BOE Gov. King on Wednesday evening UK time.
In Australia, the RBA is expected to hold rates steady when it announces its decision on Tuesday evening ET/Wednesday morning down under. RBA Asst. Gov. Lowe speaks on Friday around noon ET.
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