Highlights
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FOMC, ECB to stay on hold; BOE expected to hike |
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Eurozone finance ministers gather |
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US PPI and retail sales on Friday |
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June G7 summit briefing on Friday |
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Commentary
Brian Dolan, Chief Currency Strategist
The dollar looks set to finish out the week on a winning note for the first time in three weeks (on the US dollar index), though the week looks to have been mostly consolidation on the whole. In that sense, the overall trend of a lower dollar still seems to be intact as the fundamental picture has not changed significantly. Stronger than expected April ISM readings from both manufacturing and service sectors removed some of the pessimism over the near-term US outlook, but Friday's relatively weak NFP report failed to follow-on with upbeat news. JPY-crosses and carry trades remain active with USD/JPY still stalling below 120.50.
Next week should see the dollar resume weakening in light of mostly bullish events for the Euro and GBP and likely bearish events for the USD. The ECB is expected to hold rates steady when it announces its decision on Thursday, but to also indicate that another 1/4 point rate hike is coming at the June meeting. The BOE is unanimously expected by analysts to raise rates 1/4% to 5.50% at their meeting on Thursday. The Fed, in contrast, is expected to leave US rates steady at 5.25%, though they may tweak the statement language and restore the 'additional firming may yet be necessary' language.
Market positioning remains overweight USD-shorts and long JPY-crosses and that position overhang continues to be the limiting factor to the resumption of recent trends. Pay close attention to the market's reaction to the data and events next week, as profit-taking may again emerge on a 'buy the rumor, sell the fact' basis. In other words, if the FOMC, ECB and BOE act as expected and the dollar fails to come under renewed pressure, it suggests market positioning is too one-sided, raising the risk of a position-driven rebound in the dollar.
As well, Japan returns to full staffing next week after the Golden Week holidays, and the reaction in USD/JPY will be important to the bigger USD picture. The 120.50 level is the key upside break point and the risk is for a downside shake-out in USD/JPY and the JPY-crosses while that level holds. G7 deputies, known as sherpas, are meeting next week to prepare for the June G7/8 summit in Heiligendamm, Germany. Persistent JPY weakness may attract semi-official efforts from Japan to limit JPY weakness ahead of these discussions. German G7 officials will brief the press on Friday morning on the summit's agenda and likely topics of discussion, but be prepared for off-the-cuff comments during the week from G7 delegates. Also, next week, Eurozone finance ministers are gathering for their monthly meeting and JPY weakness may be singled out as a problem. Euro strength, on the other hand, does not seem to be a problem for Eurozone officials at the moment, but keep an eye out for any changes to that view.
Turning to important data events out of the US next week, Monday and Tuesday are light with only consumer credit and wholesale inventories due out, respectively. The highlight Wednesday will be the FOMC rate decision and accompanying statement. I expect the Fed to stay on hold and they may even leave the statement language intact. The overall outlook remains quite steady, with inflation still too high for the Fed to relax rates, and growth not weak enough to warrant a cut, leaving the Fed continuing to watch and wait for months to come. Thursday sees the March US trade deficit, currently forecast to deteriorate to -$60 bio from -$58.4 bio previously, ending a string of slightly improving deficit reports over the last few months and adding another USD-negative ingredient into the soup. On Friday, April PPI and advance retail sales will be the main movers.
Eurozone data begins on Monday with March German factory orders, followed by March German industrial production on Tuesday. Wednesday sees Germany's March trade balance. Thursday sees a heavy data schedule including: April German wholesale prices, March French and Italian industrial production, and March Eurozone OECD leading indicators. The key event on Thursday will of course be the ECB rate announcement and Trichet's press conference at 0830EDT where the market is expecting Trichet to use the "V-word" (vigilance) to signal a June rate hike is planned. If the V-word is not used, the Euro is in for trouble. Friday sees only April Spanish CPI and Dutch retail sales.
In Japan on Monday afternoon, the BOJ will release the minutes from its March MPC meeting, which may highlight renewed concerns over re-emergent deflation and provide yet another reason to keep selling the JPY. Wednesday afternoon in Tokyo sees the March preliminary Leading Economic Index. Thursday morning sees money supply and bank lending data, followed by April machine tool orders and Economy Watchers surveys in the afternoon. Also on Thursday afternoon, BOJ Gov. Fukui is scheduled to speak.
UK data starts out with April nationwide consumer confidence and the BRC retail sales monitor on Tuesday evening. On Wednesday morning, the BRC shop price index is scheduled. Thursday sees March industrial and manufacturing production, the March trade balance, followed by an expected 1/4% rate hike from the BOE.
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