This Week: Dollar at the Crossroads

For most of last week, the US dollar was under pressure vs currencies like the Euro and Swiss franc. EUR/USD even rose to a new high of 1.5985, just 15 pips shy of the all-important 1.6000 level before bouncing all the way down towards 1.5700.

But then on Friday, US dollar sentiment changed rapidly as the currency rallied following strong earnings reports by US companies such as Google (GOOG) and Caterpillar (CAT). Stock investors are happy with their stronger-than-expected earnings and Citigroup’s (C) stronger revenues, and so are carry traders, who then promptly sold the Japanese yen, thus boosting yen crosses such as USD/JPY. USD/JPY rose to its highest levels in almost two months on the return of risk appetite, and last week’s gain was the strongest since 2004.

Sustained Or Temporary Rally?

The futures market is now betting that the Fed will not cut its 2.25% target lending rate by 50 bp on April 30, compared with 46% chance a week ago. It is pricing in a 98% chance of a quarter-point rate cut. The US dollar is likely to start the new trading week with a bullish tone, rubbed off by optimism in the stock markets, but if US data such as durable goods and housing fail to meet consensus, any rebound could slow down or be hampered again. The greenback will also be influenced by US companies’ earnings reports next week.

Loonie Hangs On

The Bank of Canada is scheduled to announce its rate decision on Tuesday, and many are expecting the bank to cut the rate by 50 bp to 3%.

Forex Trading

USD/CHF’s nearest resistance is around 1.0290-1.0310, then 1.0350. USD/JPY’s upside targets are around 105.00, 105.50. Watch out for EUR/USD’s reactions around 1.5660-80.

Monday:

Australia PPI 0130 GMT

Swiss producer & import prices 0715 GMT