Forex Investment and Currency Trading

Last week ended with a better than expected non-farm payroll report, a prospect already proposed by better initial claims data, the ADP report and the employment components of the ISM indices. This print capped a week in which equities rallied strongly, the Dollar continued to weaken pretty much across the board (mostly) the real component bond yields continued to rise, reflecting the re-rating of business cycle outlook.

This week brings key pieces of data on the activity front. China publishes its data for April. Market expects the data to soften a touch from the exceptionally strong prints in April, but nevertheless we still think the Chinese economy is on a strong path to recovery. The CPI and PPI data, already released, show further falls in the year-onyear readings, but sequential momentum is ticking up in line with better activity.

In the US, the trade and TIC data will be highly important for FX views. The improving trend in the US external balance is in principal good for the Dollar, however some still expect cyclical forces to keep the Dollar on the back foot in coming months. After the sharp narrowing in the trade deficit in February on the back of Chinese New Year effects, analysts expect the deficit to widen out to US$32bn. However the rapidly improving trend in the trade deficit will remain intact.

The TIC data out on Friday will be particularly interesting as a barometer of crossboarder equity flows during the first month of the equity rally. With the release of the March data we will be able to assess where the US BBoP stands. The US will also publish retail sales data for April and market expects a 0.3%mom rise on the headline reading and +0.5% ex-autos. Finally, Friday brings April CPI. Market expects a flat reading on headline and +0.14% on core. Benign inflation data are the centrepiece of constructive stance on the rate markets in the larger developed economies.

Finally the BoE publishes the second Inflation Report of the year. Market will be particularly interested in knowing what the BoE thinks of growth going forward. This could be the first Inflation Report for several years where growth is revised up, rather than down. Asian currencies have rallied across the board in conjunction with the cyclical rally in equities.