Can King Dollar Continue Its Rally?

Currency markets continued to muddle through the start of the week with most of the pairs remaining in very tight ranges through midday North American trade. With no economic reports on the calendar the currency markets remained listless taking whatever small directional cue they could from the equity market which continued to push higher.

Aussie responded best to the uptick in equities rising through the 1.0270 level after opening gap down at 1.0195 at the start of Asian trade. In Asia investors were unnerved by the series disappointing Chinese reports, which showed that inflation increased while growth slowed.

Chinese CPI rose to 3.2% from 3.0% forecast while Retail Sales expanded at only a 12.9% rate versus 14.5% eyed. Industrial Production was also lower at 9.9% versus 10.4%. The drop in consumption was led primarily by the new Chinese government frugality campaign as high end restaurants in Shanghai and Beijing saw sales drop by as much as 30%-50% on less spending by government bureaucrats. Analysts also attribute some of the slowdown to seasonal factors due to the Chinese New Year in February. The Aussie has now carved out a very narrow 1.0150-1.0300 range as traders await more data from Down Under.

This Wednesday's unemployment report is likely to be the key driver of trade. The markets are looking for similar print as last month of approximately 10K. If the data meets or beats the expectations the pair could break the upside barrier of the range as fears over additional rate cuts by the RBA will cease. However, if the number shows that jobs contracted the pair could tumble towards parity as fears over the broad economic slowdown in Asia Pacific will weigh heavily on the unit.

EUR/USD Strength Continues
Meanwhile the EUR/USD continued to defy all odds as it hovered stubbornly above the 1.3000 level despite rising Italian CDS rates a widening of the Italian BTP/German Bund spread and weak French data. As we noted earlier, one possible reason for the units strength is the assumption by the market that the worst may be over for the euro zone. That was Mario Draghi's key argument at last Thursday's ECB presser. The ECB President argued that over the medium term, conditions are likely to improve, noting that much of the fiscal budget cuts have already been made. Furthermore the strength and robustness of the U.S. economy may be viewed as engine for growth for the EZ as investors hope that U.S. demand will prop up the region's export sector.

The strength of the U.S. economy will be tested this Wednesday with the release of the U.S. Retail Sales Data. The market is looking for a print of 0.5%. If the number meets or beats expectations it will be yet another data point that demonstrates the resilience of the U.S. economy which appears to be unfazed by either the payroll tax increase or the headwinds from the budget sequester. If the number proves better than expected it could push USD/JPY to fresh highs towards the 97.00 level as the rally in King Dollar continues.