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- Euro Remains Under Pressure, British Pound Relatively Resilient
- New Zealand Dollar, Australian Dollar Hit Hard By Carry Trade Reversal
- Japanese Yen Benefits from Risk Aversion as S&P 500 Tumbles 2.01%

US Dollar Ends Mixed as Retail Sales Contract 1.1% - Watch for Signs of US Deflation on Wednesday
The US dollar ended Tuesday on a mixed note as risk aversion in the markets worked primarily to the benefit of the Japanese yen, while high-yielders like the New Zealand dollar and Australian dollar fell sharply. The Commerce Department reported that US retail sales tumbled 1.1 percent in March, which was surprising in light of the fact that a Bloomberg News poll of economists was calling for a 0.3 percent gain. However, we had anticipated some downside risks for this reading as the latest ICSC chain store sales numbers show that the contraction in consumption accelerated during March, indicating that deteriorating labor markets, tight credit conditions, and a year-long recession are weighing heavily on the minds of consumers. Meanwhile, the Labor Department said that producer price costs fell 1.2 percent in March, bringing the annual rate of growth down to a 59-year low of -3.5 percent. Declines were led by consumer goods, energy, and foods, all of which suggests that Wednesday's release of the US consumer price index could also reflect waning price pressures.

Indeed, CPI is anticipated to have risen 0.1 percent during the month, bringing the annualized pace to completely stagnate. Meanwhile, the core measure - which excludes volatile food and energy costs - is anticipated to rise 0.1 percent and lead the annualized rate down to 1.7 percent from 1.8 percent. Overall, the news is likely to add to concerns that the US is on a one-way track to deflation, a concern that has been cited by a few Federal Open Market Committee (FOMC) members, according to the latest FOMC meeting minutes. However, the markets may only respond to the news if the annualized rate falls negative for the first time since 1955, but based on today's PPI results, there is real potential for this to happen, which could hurt investor sentiment even more and weigh on risky assets.

Euro Remains Under Pressure, British Pound Relatively Resilient
The euro remains under pressure, as it has for the past few days, while the British pound has actually held up fairly well. This dynamic is best viewed on the daily charts of EUR/GBP, which broke below key trendline support at the beginning of the month. However, the pair has only just today experienced sharp declines, which could mark a continuation of the bearish trend toward the November 2008 highs and February 2009 lows near 0.8650. From a fundamental perspective, the economic situations in both the Euro-zone and UK are still gloomy, but only the European Central Bank has indicated that they may continue cutting interest rates, as ECB Governing Council member Athanasios Orphanides said over the weekend that further rate cuts may be warranted if inflation threatens to remain significantly below 2 percent for a considerable period of time, and that the risk of deflation has increased somewhat in the past few months. On the other hand, the Bank of England has suggested they will leave rates at 0.50 percent going forward, and have already initiated quantitative easing efforts.

Related Article: Euro/US Dollar Monthly Forecast, British Pound/US Dollar Monthly Forecast

New Zealand Dollar, Australian Dollar Hit Hard By Carry Trade Reversal
Commodity dollars like the New Zealand dollar and Australian dollar were the weakest of the majors as traditional carry trades like NZD/JPY and AUD/JPY fell over 2 percent. The moves were in line with the declines seen in equities, as the S&P 500 ended the day down 2.01 percent. Interestingly enough, a Google News search of the term carry trade shows a handful of extremely bullish articles, and in times when we see broad and extreme optimism on one particular asset, we tend to see reversals.

Looking at the economic releases for the two currencies over the past 24 hours, data was generally mixed. New Zealand retail sales surprisingly rose 0.2 percent in February, but a breakdown of the report shows that this was due primarily to fuel and personal goods sales, and excluding motor vehicles, the index actually fell 0.1 percent. Meanwhile, Australian business sentiment on current conditions and the outlook improved slightly in March, according to National Australia Bank, but with the individual indices still deeply in negative territory at -17 and -13, respectively, it is clear that the nation is far from recovery mode.

Related Articles: New Zealand Dollar/US Dollar Monthly Forecast, US Dollar/Canadian Dollar Monthly Forecast

Japanese Yen Benefits from Risk Aversion as S&P 500 Tumbles 2.01%
Risk aversion was alive and well throughout the financial markets on Tuesday, which sent the classic forex carry trades tumbling hard to the benefit of the Japanese yen. In fact, the low-yielding yen gained 2.67 percent versus the New Zealand dollar and 2.19 percent against the Australian dollar. There are signs that the currency could continue to appreciate in the near-term, as the latest FXCM SSI figures - a contrarian indicator - show that traders are net long USD/JPY. However, these moves will be contingent upon risk appetite remaining low, as a resurgence in Asian and European equities overnight could easily send carry trades higher once again.

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ECONOMIC DATA

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com