Big Turning Point Ahead for the Dollar (page 1 of 2)

US Dollar

Unsurprisingly, with all of the major markets closed for Good Friday, trading has been very quiet especially since many European markets are also closed Monday. We are at an important crossroad in many of the currency pairs and next week could prove to be the major turning point that everyone has been waiting for. Volatility has compressed quite a bit and naturally so has trading ranges.

If you take a look at the weekly charts of the four majors, we are near the apex of major triangle formations, which means that breakouts are imminent. With a large laundry list of US economic data due for release next week, we have plenty of catalysts to trade off of. The Treasury International Capital flow report due on Monday could set the tone for the week. With the February trade deficit reported at $65.5 billion and the TIC forecast at $60 billion for the same month, it looks like we may be setting up for another deficiency.

If so, this would bring back the concerns that we talked about in yesterday's fundamentals, which is that with rising long term yields attracting Japanese investment money back into the country, and the Chinese using their money to invest in more tangible assets, we will have the two largest buyers of dollar denominated investments fading to the background. Alternatively however, the higher risk scenario is actually for a positive number.

If foreign inflows increase above the trade deficit, then we could set up for an extremely dollar positive week. Both CPI and PPI are due later in the week and given the 17 percent low to high rally in oil prices last month, odds are that inflation could be stronger than expected. Even if it doesn't, the market will still expect higher inflation the following month.

This morning, we saw the release of industrial production and capacity utilization figures. The report was not very telling with a strong number in March, but a larger downward revision the previous month. Capacity utilization also came in weaker than expected, highlighting the struggling nature of the manufacturing sector. We should see confirmation of this trend in next week's Empire State and Philly Fed manufacturing surveys.

Lastly, the Federal Reserve will also be releasing the minutes from their March 28 monetary policy meeting, which is also the very first meeting that Ben Bernanke served as Fed Chairman. It will be interesting to see if the meeting had a different tone under the leadership of Bernanke versus Greenspan.

Euro

The past week of trading in the Euro has been muted at best. After trying to take a stab at the 1.23 level before the previous week's ECB meeting, Euro strength failed miserably when Trichet clarified that the rate tightening this year will be more conservative as the currency's value plays a major role in monetary tightening.

Unlike this past week where we had a great deal of Eurozone economic data, the week ahead is much lighter, which will allow the market to focus more closely on US economic data. We are only expecting the region's consumer price index and French consumer spending reports. Based upon the French and German consumer price figures that already have been released, it seems that the annualized pace of inflation growth in March is expected to slow modestly. Italy reported its own CPI numbers this morning, which reflected a bit more acceleration in prices than expected.

Therefore any downticks in Eurozone CPI should be mild. The ECB continues to move forward in the process of normalizing their interest rates, but as indicated last week, they are currently doing so at a slower pace than the US.