USD Dusts Itself off After Decline, Onto Abenomics 2.0

A flurry of weak economic data put the US dollar on its heels but it stormed back later on a hint about QE tapering. The pound was the top performer on the day while the kiwi languished. Watch out for new Japanese government stimulus measures later tonight. Both of today's new USDCAD longs were triggered, awaiting tomorrow's Canada CPI figures. Both CADJPY are in progress and so is the USDJPY as these may be impacted by tonight's announcement from Tokyo. Rest of trades are in the latest Premium Insights.

The US dollar bears finally caught a break early in US trading as a stream of economic data weighed on the buck. First, initial jobless claims jumped to 330K compared to 360K expected. It was a setback for the report after a number of better-than-forecast readings.

At the same time, US housing starts collapsed to 853K compared to the 970K consensus. The 16.5% monthly drop was partly due to poor weather but it also raises questions about the real estate recovery.

The Philly Fed also underscored that manufacturing is the weak link at this point in the cycle. The index fell to -5.2 compared to +2.4 expected. New orders were especially weak.

In addition, the trend toward disinflation accelerated with CPI falling to 1.1% y/y in April, slower than 1.5% in March and 1.3% expected.

Lower inflation and slower growth is a recipe for continued quantitative easing and the dollar declined. Given the one-sidedness of the data, the real surprise might have been that the dollar didn't fall further. USD declined 50-60 pips on most crosses but no further.

That was a strong signal that the dollar bulls remain in charge. Later, Fed comments suggested tapering remains on the table. First Fed Governor Raskin said stable inflation expectations have offset deflationary pressure to some extent. Later, San Francisco Fed President Williams was explicit, saying the FOMC could reduce asset purchases as early as the summer.Just like that the US dollar recovered most of its losses and proved that it will be awfully difficult to bet against the buck.

The top item on the upcoming calendar is at 2350 GMT when Japan releases machine tool orders for March. The median forecast is +3.0% m/m. The market is less concerned with March data because it was in early April the BOJ announced fresh QE programs.

Another thing to look for is an announcement from the Japanese government on a second round of economic reforms – Abenomics 2.0. Nikkei reported that one of the measures includes incentives to boost leasing. The market will be looking for more substantial measures.