Can USD/JPY Break 100 On U.S. Retail Sales?

USD/JPY is itching to break 100 but it needs a catalyst and Friday's U.S. retail sales report could be just what the currency pair is waiting for. Economists are not looking for a good retail sales number but if the data surprises to the upside, concerns about a return to weakness for the U.S. economy would ease, helping to drive USD/JPY higher. The break through 100 was never expected to be easy but when this barrier is cleared, there could be a quick surge upwards as stops are taken out.

There's actually a very good chance that U.S. consumer spending did not slow as much as economists expect. Coming off the heels of a 1.1% increase in sales during the month of February, the consensus forecast is for zero growth in advance retail sales and retail sales less autos. However according to the Johnson Redbook index, consumer spending increased 0.7% in March from February while the International Council of Shopping Centers reported a 1.6% yoy rise. Cold weather and soft Easter spending limited the gains but spending should have still increased which means that Friday's retail sales report could show a rise in consumption versus a flat reading. With FX traders dying for a reason to push USD/JPY above 100, a positive print could be good enough. We are also looking for stronger consumer confidence. Despite the decline in payrolls, stocks have performed very well and a similar survey by Investors Business Daily found a sharp increase in sentiment. As a result, we firmly believe that good U.S. data could be just what USD/JPY needs to finally breach this key level.

Meanwhile this morning's better than expected jobless claims report helped the greenback recover part of its earlier losses. It took a while for FX traders to react but they are relieved that claims did not remain above 380K for the second week in the row. First time jobless claims fell to 346K from 388K, which was lower than the market's 360K forecast. While this improvement eases some concerns about a further deterioration in the labor market, the Labor Department attributed the plunge to unwinding of seasonal swings. The more stable four-week moving average ticked up only slightly to 358K from 355K while continuing claims dropped to 3.079 million from an upwardly revised 3.09 million. After last week's sharp decline in non-farm payrolls, incoming economic reports such as these are more important than usual because they will determine whether Federal Reserve officials will push back their date for tapering asset purchases. Aside from retail sales and the University of Michigan consumer sentiment survey, producer prices is also scheduled for release. Thursday's 0.5% decline in import prices points to softer wholesale inflation pressures.

EUR: More Frustration By ECB Policymakers
After a brief pause on Wednesday, the euro resumed its rise against the U.S. dollar but unfortunately even with the gains incurred Thursday, the currency pair has yet to break above key levels. Throughout this week we talked about how the 1.3130 level is key. The EUR/USD made its second attempt to break this level but the 50-day SMA and second standard deviation Bollinger Band continued capped the currency pair's gains on Wednesday and continued to do so Thursday. Even if EUR/USD clears this point, the real level it needs to break is the 100-day SMA at 1.3150. No major euro zone economic reports were released Thursday and as expected, the ECB Monthly report failed to set off any fireworks in the EUR/USD. According to the report, the central bank expects a gradual economic recovery in the second half of the year but the risks to their outlook are to the downside and as such policy needs to remain accommodative for as long as needed. The only thing out of Europe were comments from ECB Executive Board member Coeure who said the central bank is limited in what they can do to provide additional help to small and medium sized enterprises (SMEs), they "do not have a magic wand" and their measures are already exceptional in nature and scope. While the ECB isn't admitting defeat quite yet, these comments certainly suggests that they are growing more frustrated. Coeure's words sound strikingly similar to those made by ECB President Draghi who basically said the ECB's toolbox is empty and if you recall, these comments kicked off the rally in euro.

NZD: At 18-Month Highs
The best performing currency was the New Zealand dollar, which rose to a fresh 18-month high against the greenback. The upward momentum in the NZD/USD is so strong that weaker New Zealand Business PMI and Australian employment numbers failed to hold back the currency. The Australian dollar also extended its gains despite disappointing employment numbers. The reason why the AUD and NZD are performing so well is because of the thirst for carry, particularly by Japanese investors and in our opinion, there's no stopping this rally in the near term. According to our colleague Boris Schlossberg "The Australian labor numbers missed their mark badly with employment shrinking by -36.1K versus -6.7K eyed while the unemployment rate rose to 5.6% from 5.4% prior. The data was horrid throughout with full time numbers declining by -7.4K versus a 19.3K rise last month. The news prompted several analysts to call for further RBA rate cuts in the second half of the year and cause Aussie to drop 50 points in the aftermath of the release. However, the downdraft did not last long as buyers quickly materialized and the pair took out yesterday's highs in morning European trade. The markets are clearly taking this month's miss in the labor numbers in stride, especially given the massive upside surprise in last month data. Averaged out over two months the Australian employment is still up by more than 30K new jobs and that fact suggests that the RBA is likely to remain stationary for the time being."

JPY: Foreign Bond Purchases Inevitable
The Japanese Yen traded lower against all of the major currencies but so far has yet to breach 100 against the U.S. dollar. The Ministry of Finance released a report overnight that said Japanese investors were net sellers of foreign bonds last week. The amount of foreign bonds sold was the largest since April 2012. Some economists say this means there is no evidence of Japanese investors rushing into foreign bonds but we believe this conclusion is premature because the data was for the week ending on April 5th and the Bank of Japan did not announce their monetary policy actions until April 4th. This week's data will be more important but foreign bond sales is a trend that will eventually emerge and when it does it should last for a long period of time. The Cabinet Office will be releasing its monthly economic report this evening. Recent actions by the central bank could trigger renewed optimism.

GBP: Quiet Day, No News
The British Pound strengthened or held steady against all of the major currencies Thursday. It was a quiet day in the UK as there was no data scheduled for release. Nonetheless, inflation forecasts were raised by economists as predictions for growth decreased. Consumer-price increases will average 2.8 % this year, compared with 2.7% in March according to some reports. Bank of England Governor Mervyn King was outvoted in February and March to press for more stimulus on this very fear of inflation. Chancellor George Osborne said in his March 20th Budget that he will give BoE Governor King and the Monetary Policy Committee more flexibility to meet their 2% inflation target but this will be a job that will fall upon the shoulders of Mark Carney who takes office at the end of June. The National Institute of Economic and Social Research also released a survey this past week that suggest the economy will avoid a triple-dip recession as yesterday's GDP release showed a 0.1% rally which was the same pace in the three months through February.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.