•  USD strengthens against most majors with encouraging retail sales data

•  JPY breaks fresh new highs during the session

•  AUD drops on prospects of RBA interest rate cuts

USD – The US dollar is starting the week off stronger across most major currencies after retail sales unexpectedly rose in April reflecting broad-based gains that may ease concerns about consumer spending.  The Commerce Department reported sales edged up 0.1% after a 0.5% decline in March. Economists had expected retail sales, which accounts for about 30% of consumer spending, to drop 0.3% last month. Lower fuel costs combined with rising stock and home values are helping boost buying power, which will help underpin purchases as the labor market mends. The dollar rose on the encouraging report and as investors grew optimistic about the world’s largest economy. In further support to the greenback, Kansas City Fed President Esther George said that the US economy may expand 2% this year, hinting that the current stimulus may eventually threaten to push up inflation expectations. However, most recent CPI reports increased just 2.4% in the 12 months ended April and the government has set a target of a mere 3.5% for y/y CPI increases this year. As this target is likely to be achieved, it gives the economy plenty of room to spare before any inflationary measures are put in place in the near term or medium term. Expect the dollar to trade in current ranges as further CPI reports and housing data releases are due this week.

EUR – The euro fell to the lower end of recent ranges after an ECB official raised the possibility of negative deposit rates in Europe.  The single currency fell to lows of $1.2941 overnight after ECB policymaker Ignazio Visco said that cutting the deposit rate below zero would be an effective way to aid the economy. His comments followed recent statements from ECB head Mario Draghi who said the ECB was “technically ready” to begin charging banks on deposits held at the central as a means to encourage banks to put money to work and lend to businesses.  The ECB recently cut its main interest rate by 0.25%, bringing rates to 0.50% in an effort to stimulate the euro zone economy.  Conditions in Europe remain sluggish with Retail Sales falling -2.2% in March from the previous year while manufacturing activity remains depressed as reported last week.  The Purchasing Manager’s Index (PMI) was 46.6 in April, well below the 50 threshold denoting expansion.  More encouragingly, France forecasted that its economy is on pace to grow a meager 0.1% in Q2, the same rate as Q1 which has allowed it to avoid tipping into recession.

GBP – Last week the Bank of England refrained from boosting monetary stimulus as reports continued to show sign’s that Britain’s economic recovery is gaining momentum.  Industrial production increased by more than economist expected in March and an industry report estimated Britain’s growth accelerated in Q1.  Despite this, the pound weakened the most in two months against the dollar.  This week is light on economic releases, with Wednesday’s employment change number being the key release.

JPY – JPY is weak this morning climbing to a fresh high, above 102. JPY breaking above key psychological resistance at the 100-level encouraged further yen selling. Yen weakness appears likely to extend further in the near term with little technical resistance for JPY until around the 105.00 to 105.50 area which should encourage speculative selling. There is a clear risk that yen weakness may prove more front-loaded than we had expected. Yen  selling  will  also  have been encouraged  by  the  outcome from the G7 meeting where officials reiterated that  they will tolerate yen weakness as long as it results from the use of domestic  instruments  to  stimulate  the  Japanese  economy  and  overcome deflation.  So  far  the  scale  of  yen weakness is not yet enough to draw greater  coordinated  concern  amongst  the  international community.

Commodity currencies – The Australian dollar weakened to its lowest level in almost a year after a report showed declining business confidence due to increasing speculation that the Reserve Bank will cut interest rates to deal with the currency’s strength.  The index of business confidence released by the National Australia Bank fell to -2, its lowest reading since November, from its previous mark of 2 in March.  The Australian dollar was down 0.4% to 99.86 U.S. Cents late Monday in Sydney trading breaking a 10-month stretch of trading above parity.  New Zealand’s dollar continued a five-day loss versus the dollar as the premium on the country’s 10-year note rate over Treasuries reached a four-year low.  The Canadian dollar is following alongside its U.S. counterpart as it advanced versus the majority of its 16 most traded peers after April retail sales in the U.S. unexpectedly increased.  Futures on crude oil dropped 1.3% to $95.00 per barrel in New York trading.  The Canadian dollar is outperforming in April versus all nine developed nation currencies being followed by the Bloomberg Correlation Weighted Index with a gain of 2.5%.


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