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- New Zealand Dollar to See Market-Moving Inflation Data Overnight
- British Pound, Euro Test Support as Euro-zone CPI Hits Record Low of 0.6%
- Canadian Dollar Strength Could Be Quelled by Friday's CPI Results

US Dollar, Japanese Yen the Strongest of the Majors as Classic Carry Trades Fall Under Pressure
The US dollar ended the day only marginally higher versus the Japanese yen, but all told, the two low-yielding currencies were easily the strongest of the majors. There were hints of risk aversion in the forex market, as evidenced by the declines in carry trades, but on the other hand, equities gained, which signals a further deterioration in broad risk correlations. US economic news was broadly disappointing, as the Commerce Department reported that US housing starts fell 10.8 percent in March to an annualized pace of 510,000, bringing the rate back down toward the record low of 488,000 hit in January. Even worse, building permits plunged 9.0 percent to 513,000, which is the worst reading since recordkeeping began in 1960. The data highlights the fact that home inventories far exceed demand, and until the balance comes closer to equilibrium, prices are unlikely to recover substantially while housing starts and applications for permits should fall further.

Next, the Labor Department reported that initial jobless claims fell by 53,000 during the week ending April 11 to 610,000, marking the second straight month of improvement. Ultimately, there wasn't much optimism to be gleaned from the news, though, as continuing jobless claims jumped 172,000 during the week ending April 4 to 6,022,000, which is the highest since recordkeeping began in 1967. All told, the data suggests that the ascent of the US unemployment rate is likely to accelerate throughout 2009 and into 2010.

Finally, the Philadelphia Fed's manufacturing activity index rose more than expected to -24.4 in April from -35.0, thanks to improvements in new orders, delivery times, inventories, and number of employees. That said, all of these components remain deeply negative, indicating that there is still a contraction in activity, albeit at a slower pace.

Looking ahead to Friday, the preliminary reading of the University of Michigan's consumer confidence index for April is projected to have risen to 58.5 from 57.3, which would mark the second consecutive increase. However, based on the disappointing retail sales results we saw on Tuesday and the dismal employment figures we saw today, there are likely significant downside risks for the confidence index, especially since the 28-year low from November looms close below at 55.3. Traders should also make a point of looking at the inflation expectations component of the University of Michigan's survey, as indications that consumer anticipate that price growth will slow substantially may add to deflation fears.

Related Article: US Economic Data Weighs on Risk Appetite

New Zealand Dollar to See Market-Moving Inflation Data Overnight
The New Zealand dollar was once again the weakest of the majors, as forex carry trades were hit hard. In fact, the Kiwi fell 1.66 percent against both the US dollar and Japanese yen, and these sharp moves may not be over yet. At 18:45 ET, data is expected to show that the New Zealand's consumer price index rose 0.3 percent during Q1, bringing the annual rate down to a more than one year low of 3.0 percent from 3.5 percent. During Q4 2008, prices contracted for the first time in two years and by the most in ten years, so unless we see another surprise contraction during Q1, the news may not add to speculation that the Reserve Bank of New Zealand will cut rates again during their next meeting on April 29. As it stands, a Bloomberg News poll of economists is reflecting expectations for a 50 basis point cut to 2.50 percent, while Credit Suisse overnight index swaps are forecasting a 25 basis point reduction to 2.75 percent. As a result, this upcoming inflation report could be highly market-moving for the New Zealand dollar, but if inflation pressures prove to be stronger than anticipated, the currency could rally.

Related Article: New Zealand Dollar/US Dollar Monthly Forecast

British Pound, Euro Test Support as Euro-zone CPI Hits Record Low of 0.6%
The British pound and euro both ended the day lower as the US dollar proved to be one of the strongest major currencies, pushing EUR/USD down for a test of 1.3130 and GBP/USD down toward 1.4850. The only data released for either currency came from the Euro-zone, as Eurostat confirmed that CPI fell to a 0.6 percent annual pace during March, which is the lowest since recordkeeping began in 1991. Meanwhile, CPI excluding volatile items like energy, food, alcohol and tobacco eased to a 1.5 percent pace from 1.7 percent. Overall, the data highlights that inflation remains well below the European Central Bank's 2.0 percent inflation target, and combined with news that industrial output in the region fell an annualized 18.4 percent in February, evidence continues to suggest that the ECB may cut rates on May 7.

Canadian Dollar Strength Could Be Quelled by Friday's CPI Results
The Canadian dollar held its own at the start of the US trading session on Thursday, leading USD/CAD to test 1.20, but the currency later reversed as US dollar strength dominated in the markets. Volatility for the Canadian dollar is likely to continue through the end of the week, as upcoming data will provide an update on how inflation trends fared during Q1. According to the Bank of Canada's last Monetary Policy Report in January, the Bank expects core inflation to fall throughout 2009 to a low of 1.1 percent, while headline inflation is expected to fall below zero for two quarters in 2009. Friday's release of headline CPI is anticipated to have risen 0.3 percent during March, but the annualized measure should remain well above zero at 1.4 percent. Meanwhile, core CPI is projected to have increased by 0.2 percent, leaving the annualized rate at 1.9 percent. All told, these numbers will reflect fairly stable price growth, albeit below the BOC's 2 percent target, but if the figures reflect a contraction in prices, the Canadian dollar could pull back across the majors. On the other hand, resilient price growth could contribute to Canadian dollar gains, as the moves would suggest that the Canadian economy is holding up better in the current environment relative to other major economies, like the US.

Related Article: US Dollar/Canadian Dollar Monthly Forecast

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