The U.S. dollar continues its domination over a basket of currencies as investors increasingly bet on the Federal Reserve to raise interest rates over the summer. Those same expectations are also weighing on the price of gold. The yellow metal slipped on Monday morning against the buck and understandably so: gold pays no interest. It's only natural to see investors steer clear of gold with Fed interest rate hike expectations on the rise.
Meanwhile, some regional bourses slid in early Monday trading after last week's previous gains. Investors are taking a brief pause from a rally that has carried various equity indexes to all-time highs. Aiding the retreat overnight was specific export data from the world's second-largest economy, China. With that country's economy in a slump, it is dampening market enthusiasm. Some of the unexciting outlooks for major economies in Asia are continuing to support the dollar's rising trend among the majors despite the questionable nature of some of the data.
Key monetary policy announcements from the European Central Bank (ECB) and the Bank of Canada are expected to headline events this week. The ECB meet on Thursday in particular is expected to be a non-event, but market participants will look for clues as to when the ECB might begin to taper its bond purchase program as the deflation threat eases, and the economic recovery continues to show signs of life.
In the U.K., authorities will post consumer and producer-prices along with the labor market report for March. Canada releases its own consumer prices and retail sales data this week. In general, global investors will be carefully monitoring China’s first quarter growth along with its March industrial production and retail sales data.
The "big" dollar is expected to garner some natural support from the U.S.'s key releases, and prove that the recent slowdown in U.S. activity is a result of "transitory" factors. The release of March retail sales data tomorrow in particular could be encouraging, while on Friday the market will be hoping that the consumer-price index (CPI) report will provide more support for the view that year-over-year inflation rates are bottoming out.
Last week, the market grew accustom to reports citing various Chinese officials predicting soft trade activity. Nevertheless, the proof is always in the pudding and on innuendo. Overnight data releases seem to have justified their pessimism.
Reports on Sunday show that Chinese trade surplus was the lowest in over a year, as both exports and imports were down by double digits at -15.0% versus +9.0% expected, and -12.7% versus -10.0% expected, respectively. Soft external demand was visible in all regions, with shipments to the U.S. falling -8%, the European Union by a -19% margin, and Japan by a whopping -25%.
Declining imports was also notable considering consecutive improvement in iron ore and crude oil shipments. After the release, Chinese customs noted that while the first quarter disappointment was attributed to seasonality around the Lunar New Year, the second quarter would see some improvement despite ongoing uncertainty. The imports drop was due to lower commodity prices, and the Chinese government is expected to work to meet broader 2015 targets.
After the March trade shocker, investors are not expecting prospects to be looking great for China's first-quarter gross domestic product (GDP) data due this Wednesday. Poor offshore demand continues to weigh on growth even after the Lunar New Year lull. High labor costs and the yuan exchange rate are also partly to blame. With inflation remaining low, the market can expect the Chinese government not to hesitate to ease further. However, with the fall in imports nowhere near the worst historic levels, it does give authorities some timing latitude.
The AUD ($0.7569) has managed to trade below the psychological $0.76 handle on the China trade data release. With China first-quarter GDP on tap, slowing demand for basic materials on Mainland China will continue to resonate in Australia. With more and more analysts continuing to cut their iron ore targets to +$48 and +$45 a ton, it will have a negative impact on the Australian economy and its currency despite the forex carry-trade demand.
Outside of China's sputtering trade numbers, economic data was heavily concentrated on Japan, where money supply data met consensus (+3.6%), machine orders' decline was smaller-than-expected (-0.4%), and corporate goods inflation was higher than estimated (+0.7%). Despite the more upbeat results, Bank of Japan (BoJ) Governor Haruhiko Kuroda reiterated core-CPI is expected to stay around zero for the time being due to energy prices, as he pledged to maintain the bank's quantitative easing program for as long as it's needed to firmly hit +2% inflation.
The BoJ also released its minutes from the mid-March meeting. Bank officials issued a familiar assessment calling for the economy to continue its moderate recovery as inflation expectations rise from a longer-term perspective.
Yen Crosses Could Cloud Dollar's Move
USD/JPY opened a touch lower (¥120.02), but has since subsequently rallied toward ¥120.75, dragged higher mostly by Asian dollar buyers. Market bids still remain solid ahead of ¥120.00 with light stops mixed in pre-¥120.00. Option interest strangleholds have the pair confined to a tight range ¥120-¥121. However, JPY bid on the crosses should add to the market's appeal of selling USD/JPY strength within that range for the time being.
Analysts are looking to AUD/JPY 200-HMA at 91.56 fueling tech sellers. Mid-March EUR/JPY lows at 129.91 look vulnerable. A break with momentum could provide JPY some support and lead the crosses to push USD/JPY to retest ¥120 again.
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