Dollar Rally Stalls

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Market Drivers for May 13, 2013
USD/JPY hits fresh high but backs off
Aussie drips lower post mixed Chinese data
Nikkei fresh highs 1.20% Europe -0.39%
Oil $95/bbl
Gold $1429/oz.

Europe and Asia:
AUD NAB Business Confidence -2 vs. 2
AUD Home Loans 5.2% vs. 4.0%
CHF Retail Sales -0.9% vs. 2.4%

North America:
USD Advance Retail Sales 8:30
USD Retail Sale Less Autos 8:30
USD Business Inventories 10:00

A very quiet night of dealing in FX on the first trading day of the week with dollar mildly bid across the board after a weekend article by WSJ reporter Hilsenrath suggested that the Fed may be starting to consider exit plans from the QE.

In the article Mr. Hilsenrath notes that, “Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.”

The issue of timing remains the key question for the currency market and until the Fed provides some sort of a time table FX is unlikely to have much of a reaction to the news. USD/JPY did spike out in early Asian session taking out the 102.00 barrier to hit 102.14, but the rally petered out by European dealing with profit taking driving the pair back to 101.50. As we’ve noted before USD/JPY sees 4 year resistance at the 102.00 figure and give the massive rally at the end of last week, it is unlikely to barrel through that barrier before consolidating its gains for a few days.

In Australia the mixed eco data out China which showed that both Industrial Production and Retail Sales both missed forecasts and were slightly lower that the month prior, weighed on the Aussie which once again slid below parity and approached its Friday’s lows of .9960. The pair is now clearly in liquidation mode with every rebound simply an opportunity for shorts to reset their trades.

Although the Aussie continues to sport the highest yield in the G10 universe the market anticipates further rate cuts from the RBA as growth in China slows and that sentiment is putting tremendous downward pressure on AUD/USD despite the bids from various central banks seeking reserve diversification. With shorts now eyeing the .9950 level, a break lower could open a run to .9900 as the day proceeds.

With no material data overnight, the FX market will focus on the North American calendar as traders await the release of the US Retail Sales data at 12:30 GMT. The market anticipates another contraction of -0.3% from -0.4% the month prior. If the data surprises to the upside and prints positive, the news could provide another boost to USD/JPY and push the pair through 102.00 once again as expectations of a Fed QE exit from QE will ratchet higher. If however, the data prints in line or shows a further contraction the dollar rally is likely to see some correction with USD/JPY drifting back to 101.00 as more profit taking kicks in.

Boris Schlossberg
Managing Director

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