Dollar On The Defensive
US dollar bulls did not glean much encouragement from the latest batch of US data, with the effect of the stronger than expected March retail sales print (+0.8% m/m) diluted by a more modest gain in the ‘control series’ that feeds into GDP (+0.4% m/m), not to mention the declines in the current activity index in the April Empire State manufacturing survey (to 6.6 from 20.2) and the April housing market index (to 25 from 28). EURUSD has recovered from its overnight lows, and USDJPY remains heavy. Nonetheless, the euro should continue to be constrained by the prospect of soft ZEW survey results today amid already nervous conditions in peripheral bond markets ahead of more supply in Spain later this week. Moreover, the recent USDJPY pullback should provide an attractive opportunity for dip buyers ahead of the key Fed and BoJ policy decisions next week. Any further weakness in USDJPY and the Nikkei would simply magnify the risk of a bolder policy reaction in Japan which, superimposed upon a steady Fed stance, could quickly put the yen on the back foot again. Ahead today apart from the ZEW survey, the focus will be on the RBA minutes for further details on the dovish policy statement. Our baseline scenario continues to peg a rate cut at the RBA’s May meeting, though the monthly inflation data will be critical. Also in the spotlight today will be the Bank of Canada, which is expected to remain on hold, though the recent strength of the employment data has raised the prospect of a shift towards an explicit tightening bias. This figured prominently in the recent revision to our three-month USDCAD forecast to 0.98.
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UBS Investment Bank