USD to stay on the offensive this week?

Asia and Europe kicked off the week with downbeat sessions, but the US is trying to rally in early going. But worries may continue to outweigh in the week ahead after Friday’s ugly close.

Asia and Europe got the markets off to a weak start for the week, as major equity averages dropped further and Euro Zone peripheral debt spreads stretched wider (in Spain’s case to the widest since early December of last year). EURUSD tickled the key 1.300 level and the USD was generally stronger until shortly before the US equity trading session, where US data boosted sentiment again and sent the USD back on the defensive. After Friday’s ugly reversal in equity markets, the bulls have some work to do, and there is plenty to worry about this week as we discuss below.

The Chinese widening of the yuan trading band over the weekend suggests there is far less pressure now on the yuan to appreciate and this could mean that the USDCNY pair begins to trade more according to the ebb and flow of market demand in the months ahead – at least, we can hope so, as a further loosening of policy is vital in the long term for addressing global imbalances. The latest FDI number for China is set for release tonight in Asia. The latest string of FDI data continues to show a shrinking appetite for investing in the mainland economy.

US Data
The US Retail Sales data was very strong, particularly given the recent strong rise in the price of gasoline, as the ex Autos and Gas number came in at a robust +0.7% MoM. The Empire Manufacturing number provided less cause for enthusiasm, coming in far short of expectations, though still north of the zero level that demarcates expansion vs. contraction. The internals of the survey showed New Orders at a relatively steady 6.48 vs. 6.84 in Mar. and the Number of Employees index rose impressively to a cycle high of 19.28. Prices received were also the highest in four months.

Looking ahead
In addition to the economic calendar items I covered in my Friday report for this week, we’ve also got three more events this week that will receive some focus – the Spanish bond auction (2- and 10-year notes) on Thursday, the G-20 meeting of finance ministers on Friday, and the first round of the French election. The Spanish bond auction may be the point at which the ECB decides it is necessary to step in and begin buying bonds again via the SMP and would mean a de facto new move into QE again.

As for the G-20, if we are to take this weekend’s comments from IMF powers that be over the weekend, it looks like any decision on further funding is going to wait another quarter or more, with the uncertainty of French elections around the corner and the general grumblings that the Euro Zone is insufficiently committed to saving its own sinking ship. As for Sunday’s French election, the march of Hollande appears to be proceeding according to plan, though not without interesting twists, especially from France’s far left, where the firebrand Melanchon could make things interesting for a president Hollande after the May 6 run-off. See this interesting article from Reuters yesterday.

On Friday, we were again questioning what EURUSD is doing at these levels, given the obvious re-aggravation of the Euro Zone crisis . The recent appearance of a softening in the Fed’s stance is the main reason we’re at 1.30 rather than 1.25, but positioning in the market is also relatively heavily short the single currency already. Still, the downside is preferred for now and a break of 1.30 may take place already this week, particularly as risk appetite appears to be on the defensive again and that almost always provides a significant tailwind for the greenback. Elsewhere, 1.5800 is a huge area for GBPUSD , with the 200-day and 55-day moving averages converging just above that level and flat-line support coming in as well. In USDJPY, 80 is the continued focus, in USDCAD parity continues to tease (remember BoC meeting tomorrow, could provide launching pad out of the range finally, one way or the other), and AUDUSD is playing peek-a-boo with the 200-day moving average at around 1.0380.

Watch out for the RBA meeting minutes in Asia tonight, which could provide further impetus for Aussie directionality after the confusing back and forth of recent days.

Economic Data Highlights

• Switzerland Mar. Producer and Import Prices out at +0.3% MoM and -2.0% YoY vs. +0.5%/-1.8% expected, respectively and vs. -1.9% YoY in Feb.
• Norway Mar. Trade Balance out at +46.4B vs. +45.3B in Feb.
• Euro Zone Feb. Trade Balance out at +3.7B vs. +5.0B expected and vs. +5.3B in Jan.
• US Apr. Empire Manufacturing out at 6.56 vs. 18.0 expected and 20.21 in Mar.
• US Mar. Advance Retail Sales out at +0.8% MoM and +0.7% ex Autos and Gas vs. +0.3%/+0.5% expected, respectively
• US Feb. Total Net TIC Flows out at +$107.7B vs. +$30.0B expected and +$3.18B in Jan.
• US Feb. Net Long-term TIC Flows out at +$10.1B vs. +$42.5B expected and +$102.4B in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

• US Feb. Business Inventories (1400)
• US Apr. NAHB Housing Market Index (1400)
• US Fed’s Pianalto to Speak on Banking and the Economy (1630)
• US Fed’s Bullard to Speak on Economy and Monetary Policy (1930)
• Australia RBA Apr. Meeting Minutes (0130)
• New Zealand Mar. Non-resident Bond Holdings (0300)
• Japan Mar. Consumer Confidence (0500)