• USD strong against most majors as strong retail data boosts economic outlook.

• EUR weak against USD after Italian bond auction showed less demand.

• Commodities remain flat against the USD as investors await the RBNZ’s rate decision.

USD – The USD is up against most major currencies as retail sales data rose 1.1 percent in February, the latest sign of momentum for an economy facing headwinds from higher taxes and pricier gasoline.  Retail sales excluding gasoline, automobile, and building material sales rose 0.4 percent from the prior month, adding to the positivity for consumer spending this quarter.  With strong gains in employment and manufacturing numbers, the solid retail sales data is still insufficient in shifting the Federal Reserve’s accommodative monetary policy.  Market participants believe that the gains in core sales in the first two months of the year offered hope that consumer spending, which accounts for approximately 70 percent of the US economy, would not slow much this quarter after growing at a steady 2.1 percent annual rate last quarter.  Jobless claims data, University of Michigan inflation report, and the core CPI data due tomorrow and Friday will provide more insight into the direction of the USD.

EUR – The euro fell against the USD after Italian bond yields rose after this week’s auction.  The Italian debt auction saw weaker demand and higher borrowing costs compared to previous auctions due to continuing political uncertainty in Italy.  Industrial production data in the euro zone was down 0.4 percent in January, as output in euro zone factories fell more than expected at the start of 2013 and production in France and Germany slipped in the latest signs that both countries are struggling to emerge from recession.  The euro zone reading may provide an incentive for the ECB to consider cutting interest rates to below the current 0.75 percent rate later this year, in order to lower the cost of borrowing for companies and households.  Market participants expect the euro to remain in the 1.2955-1.3001 range until the release of the euro zone employment data due tomorrow.

GBP – The sterling recovered from a 2½ year low against the USD, up 0.3 percent, as investors believe its recent steep falls may have gone too far.  The pound’s gains were the result of investors who had sold it at higher levels after seeing an opportunity to take profit, given a lack of UK data for the rest of this week.  However, the sterling’s gains are tempered by better than expected US retail sales data which continues to provide support for the USD.  Investors believe the sterling could recover further in the coming days, but is highly vulnerable to the downside on bad UK economic news and data.  With the lack of any major data due in the next few days, market participants believe the sterling should keep support at the 1.4230-1.4880 range until economic data reports due next week.  

JPY –The Japanese yen is slighter weaker vs. the US dollar after yesterday’s rebound on expectations the BoJ will deliver aggressive stimulus and a widening yield gap between U.S. and Japanese government bonds.  The Japanese parliament plans to sign off on the nomination of former currency diplomat, Haruhiko Kuroda as BoJ’s next chief later this week.  With Kuroda’s vow to pursue radical measures to lift Japan’s inflation rate to 2 percent, which has not happened in over 2 years, the yen remains under pressure.

Commodity Currencies – The CAD strengthened against the USD, due in part by the better than expected US retail sales data and the lingering effects of last week’s employment report.  The CAD is expected to trade between the 1.0220-1.0320 ranges as movements on the market will be minimal with the lack of new economic data this week.  The AUD and NZD weakened against the USD, as investors awaited the RBNZ’s interest rate decision, and the Australian employment data.  Investors are certain that the RBNZ will continue to leave its benchmark rate at a record low of 2.5 percent.  The RBNZ has flagged concerns about the high NZD and is likely to be cautious about being too hawkish in the official statement in fear of further appreciation of the NZD.  Expect the AUD to remain steady at the 1.0316 levels and the NZD at 0.8210-0.8252 ranges.

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