FOREX: Major Currencies Consolidate, Dollar to Resume Rally Next Week

Currency markets consolidated in quiet ranges overnight and more of the same looks likely through the week-end, with the US Dollar rally returning next week.

Overnight Headlines

• Swiss Franc, Japanese Yen Outperform in Quiet Overnight Trade
• Bank of Japan Keeps Monetary Policy Unchanged as Expected

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4232	1.4415
GBPUSD	1.6159	1.6349

The Euro and the British Pound were little changed in overnight trade. The single currency oscillated in a narrow range near 1.43 to the US Dollar while Sterling consolidated below 1.6240 to the greenback. We are looking for EURUSD and GBPUSD selling opportunities and remain long USDJPY.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
22:45	NZD	Net Migration s.a. (APR)	-100	-	-510 (R+)
1:30	AUD	RBA Foreign Exchange Transaction (A$) (APR)	270M	-	699M
3:00	NZD	Credit Card Spending s.a. (MoM) (APR)	1.6%	-	-1.4% (R+)
3:00	NZD	Credit Card Spending (YoY) (APR)	6.0%	-	1.6% (R+)
3:15	JPY	Bank of Japan Interest Rate Decision	0.10%	0.10%	0.10%
4:30	JPY	All Industry Activity Index (MoM) (MAR)	-6.3%	-6.1%	0.7%

Currency markets were little changed in overnight trade, with the major currencies confined to narrow ranges against the backdrop of a lackluster economic calendar and indecisive risk sentiment trends. The Swiss Franc and the Japanese Yen narrowly underperformed toward the end of the session as Asian stock exchanges managed a small advance, weighing on safe-haven demand for the former currency and spurring carry trades funded in the latter.

The Bank of Japan unanimously voted to keep interest rates on hold at 0.10 percent as expected. The bank's asset-purchase fund and credit-loan program were also left unchanged at 10 trillion and 30 trillion yen, respectively. Policymakers kept their economic forecasts unchanged and echoed familiar sentiments, saying the economy “faces strong downward pressure” and will remain under stress “for the time being”. They added that a recovery was expected in the second half of the 2011 fiscal year. Japan formally entered into recession as growth shrank in the first quarter.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
6:00	EUR	German Producer Prices (YoY) (APR)	6.0%	6.2%	Medium
6:00	EUR	German Producer Prices (MoM) (APR)	0.6%	0.4%	Medium
7:00	JPY	Convenience Store Sales (YoY) (APR)	-	7.7%	Low
8:00	EUR	Euro-Zone Current Account s.a. (€) (MAR)	-	-7.2B	Low
8:00	EUR	Euro-Zone Current Account n.s.a. (€) (MAR)	-	-9.5B	Low
8:00	EUR	Italian Industrial Orders s.a. (MoM) (MAR)	0.5%	1.9%	Low
8:00	EUR	Italian Industrial Orders n.s.a. (YoY) (MAR)	15.7%	16.2%	Low
8:00	EUR	Italian Industrial Sales s.a. (MoM) (MAR)	-	1.5%	Low
8:00	EUR	Italian Industrial Sales n.s.a. (YoY) (MAR)	-	12.8%	Low

The economic calendar carries no first-tier economic releases and while indecisive positioning on S&P 500 stock index futures hints risk sentiment trends have not settled on a defined direction over the last hours of the trading week. Furthermore, the US data docket has cleared out for the week, pointing to continued consolidation through Friday's session in European and North American trading hours.

Broadly speaking, the standstill will cap a week of corrective gains across the spectrum of risky assets after two weeks heavy losses, with the retracement relieving some oversold pressure and seemingly opening the door for renewed downside next week as the expiry of QE2 – arguably the fuel source for buoyant markets over recent months – looms ever closer. As noted in detail in our forex trend monitor, this promises to drive the US Dollar higher against the spectrum of major currencies.

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