Better Trade Data Fails to Lift Dollar, Making 1.30 Seem Inevitable

·          Better Trade Data Fails to Lift Dollar, Making 1.30 Seems Inevitable

·          Euro Continues to Push Higher on Hawkish ECB Comments

·          Next Week Will Give Clues on Whether the Strong Yen has Hurt Growth

US Dollar - Even though the US trade balance came out much stronger than expected, the beleaguered greenback could not hold onto its earlier gains.  Although it may be tempting to credit the dollar’s resumed sell-off to the weak consumer confidence report released less than two hours later, the dollar actually did not begin selling off once again until London traders went home for the weekend around 12:30pm EST.  Therefore it indicates that the even though we saw a good trade balance number, it was not good enough.  When it comes to dollar positive news, bearishness is so embedded in the market that it needs a much larger surprise to the upside than to the downside.  If the trade balance simply widened to -$68B instead of the forecasted -$67B, we would have surely seen the EUR/USD make a run for 1.30.  However, the $5 billion upside surprise did essentially nothing for the US dollar despite the irrefutably positive tone of the report.  The trade deficit for the month of March was the best that we have seen since August.  The improvement was a direct result of a weaker dollar boosting exports along with a 2.7 percent fall in crude oil prices in the month of March.  Remember that the bulk of the rally in oil prices did not begin until April.  Oil prices range traded for most of March and while the US dollar just began to quietly weaken.  This will be very encouraging for the first quarter GDP report, but as traders soon realized that it will not be until the next month that we see how trade activity performed in such a volatile environment.  Although it may be tempting to jump the gun and say that all of the bullishness in today’s report will be erased when the April report is released, the influence of oil will have to contend with the influence of the US dollar.  Oil prices will certainly raise the value of imports and hurt the deficit, but at the same time, the weaker dollar will help to boost exports.  Demand from Asia has been particularly strong and today’s trade surplus figures from China confirm that.  Next month we will really get the chance to see which has the bigger influence on trade – oil or the US dollar.  Meanwhile, the market will turn its focus to Monday’s Net Foreign Purchases or Treasury International Capital flow (TIC) report. As the next trade balance report is too far away for short term speculators to dwell much upon, the TIC data still has the potential to help the dollar recover.  The market is predicting foreigners to have bought $80 billion worth of dollar denominated assets in March.  If this proves to be the case, then there is ample money coming into the market to plug the same month’s trade deficit.  However with many central banks diversifying away from the US dollar, $80 billion may be a very optimistic estimate.  Aside from the TIC, the US will also be releasing inflation figures.  As the market tries to predict the Federal Reserve’s next move, inflation numbers will be closely watched.  The rise in import prices suggest that headline prices will be higher on both the producer and consumer level, but as we all know, the real uncertainty lies in core prices. 

Euro - The Euro has ended higher against the dollar for the fifth consecutive trading week.  It is becoming increasingly clear to us that the market wants to take a shot at 1.30 as the EUR/USD recuperated all of its previous losses despite a stronger trade balance report.  Meanwhile the Euro continues to get a boost from hawkish central bank comments.  ECB member Gonzalez-Paramo joined the list of Eurozone government officials hinting at more aggressive measures by the European central bank.  Echoing the comments made by Dutch central banker Wellink yesterday, Gonzalez-Paramo said that a 50bp move is an option. He argues that growth is expected to continue while oil prices pose a big risk for second round inflation effects.  Although we still remain very skeptical of a 50bp move, it is important to mention that ECB officials love to prepare the market for possible moves.  Therefore, all of this talk of a 50bp hike may be their way of telling the market not to completely write off this possibility and we acknowledge that. Eurozone economic data released this morning were pretty much in line with expectations.  Each report confirmed the ECB’s need to raise interest rates as the growth in consumer prices accelerate in Germany and in France while the French trade balance contracted slightly in March.  The OECD leading indicator for the region also increased from 108.6 to 109.  In the week ahead, we are expecting a handful of important Eurozone economic data including the ZEW survey, French unemployment, German producer prices, Eurozone CPI and Eurozone industrial production. 

British Pound  - Over the past week, the British pound has rallied 450 pips against the US dollar.  In the past month, it has rallied over 1400 pips.  Although we are tempted to say that the move is becoming overdone, it may not be until the market has a chance to test 1.90. With the extremely busy economic calendar next week, we have ample opportunities for this scenario to unfold.  There are a variety of house price reports due for release in addition to consumer prices, leading indicators, unemployment, and retail sales.  The Bank of England will also be releasing their minutes from the central bank meeting held earlier this month.  With economic data already improving, it is possible that the minutes may be relatively hawkish.  Bank of England member Walton has already hinted to the markets that they believe growth is on path to reach its target and that the economy’s “recovery is established.”  If he is proved correct by next week’s reports, sterling bulls could burst above 1.90 and not even look back. 

Japanese Yen – The dollar broke below the psychologically important 110 level against the Japanese Yen but failed to close below it.  Having lost 850 points over the past month, the yen is reaching critical levels.  Unlike the UK, USD/JPY has the potential support of the Bank of Japan.  Should the central bank warn more aggressively about the possibility for intervention, we could see a nice reversal in a currency pair that has taken quite a beating.  There are a lot of important economic releases due out of Japan next week and the market will be looking very closely to see if the strong yen has had an impact on growth.  This includes the prices of capital goods, trade and current account balance, consumer confidence, industrial production, GDP and leading indicators.  The Bank of Japan will also be meeting on interest rates followed by a press conference from Governor Fukui.