Dollar Narrowly Mixed in Thin Holiday Trading

  • The dollar rally is back on track
  • The Atlanta Fed’s GDPNow model is now tracking 2.8% SAAR for Q1
  • During the North American session, the US reports March housing starts and building permits
  • Japan reported March national CPI; USD/JPY remains stuck around the 112 area

The dollar is narrowly softer against the majors in thin holiday trading. Stockie and Swissie are outperforming, while Aussie and Loonie are underperforming. EM currencies are narrowly mixed. MYR and HUF are outperforming, while RUB and ZAR are underperforming. MSCI Asia Pacific was flat, with the Nikkei rising 0.5%. MSCI EM is up 0.1% so far today, with the Shanghai Composite rising 0.6%. European and US stock markets are closed. So is the US bond market. 

The dollar rally is back on track. DXY traded yesterday at its highest level since April 2 and is on track to test that day’s cycle high near 97.71. For the euro, the break below the $1.1235 area yesterday sets up a test of the April 2 low near $1.1185. That level is the key 62% retracement objective of the big 2017-2018 rally. Break below that would set up a test of the January 2017 low near $1.0340.

Because of the strong March retail sales report, the Atlanta Fed’s GDPNow model is now tracking 2.8% SAAR for Q1, up from 2.4% previously. Elsewhere, the New York Fed’s Nowcast model is tracking 1.4% SAAR for Q1 and 2.0% for Q2 but it has not been adjusted yet for the retail sales data. Both models have seen their forecasts rise sharply in recent weeks. The divergence story has come back in recent weeks, and that supports our ongoing strong dollar call.

During the North American session, the US reports March housing starts and building permits. The former is expected to rise 5.7% m/m and the latter by 0.7% m/m. It’s strange that this data is being reported today even though US bond and equity markets are all closed.

Japan reported March national CPI. Headline inflation picked up to 0.5% y/y from 0.2% in February, as expected. Ex-fresh food was a tick higher than expected at 0.8% y/y. Inflation remains frustratingly low and far from the 2% target. BOJ next meets April 25, no change is expected then. Press reports suggest that the BOJ will forecast inflation of 1.5-2.0% in FY2021 in its quarterly outlook report out at this month’s policy meeting.

USD/JPY remains stuck around the 112 area. If our strong dollar call continues to pan out, a clean break above should be seen in the coming days. The December 13 high near 113.70 is our next upside target, while support is seen near the 111 area.