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Majors Hemmed in Narrow Ranges

The U.S. dollar was hemmed in narrow overnight ranges with many of the world’s major trading centers closed for Good Friday. While Tokyo markets remained open overnight, volumes quickly evaporated during the European session and with U.S. equity and bond markets closed today, activity in North America should be especially light as well. On balance, the week saw a mixed performance for the greenback. On one hand, economic data like initial jobless claims, the Philly Fed survey, and industrial production have all played up the notion of a spring recovery after America’s economy hit a slow patch this winter. Indeed, such a scenario should see Treasury yields and the dollar rise in anticipation of higher rates from the Fed. However, U.S. monetary officials continue to sound a decidedly dovish tone on the outlook for policy and have effectively kept rates hike expectations at bay. Investors will look to the Fed’s April 30th FOMC meeting and the early May payrolls data for further clues on the timing of an eventual rise in U.S. borrowing costs.      

The Japanese yen touched on a 10-day trough against the dollar overnight as some of the currency’s safe-haven premium waned after four-way talks called for an immediate end to violence in Ukraine. The U.S., EU, Russia and Ukraine agreed to a halt in violence following the talks, which saw investors, who had sought relative safety in yen assets, unwind those positions following the announcement. The yen was also pressured following this week’s positive economic figures from the U.S.

The British pound hovered near its highest level in five years against a basket of currencies following this week’s solid employment figures and inflation data that was in-line with market forecasts. Investors continue to expect the BOE to lead in eventual monetary policy normalization, likely beginning sometime in early 2015.

USD: The dollar remained stuck within tight ranges overnight as many of the world’s major trading centers were closed in observance of Good Friday. The dollar put in a mixed performance this week, with strong data being largely offset by dovish comments from Fed Chair Janet Yellen. On the data front, reports showed strong gains in regional manufacturing activity in the Mid-Atlantic this month along with lower than expected jobless claims and a strong rise in industrial production. The figures this week, in large part, bolstered the view that the economy’s recent soft patch was indeed a function of the harsh weather and that as temperatures warm, economic activity should rebound. Such a scenario could ultimately bring in the timeline of an eventual Fed rate hike. Investors will turn to the Fed’s late April FOMC meeting and the early May payrolls report for further evidence of the spring rebound and for further clues on the outlook for Fed policy.  

JPY: The Japanese yen fell to a 10-day low against the greenback overnight as investors unwound some safe-haven positions following signs of moderating tensions in Ukraine. Following four-way meetings between the U.S., EU, Russia and Ukraine, a statement that called for a halt to violence saw some investors sell the low yielding yen in favor of higher yielding investments. However, the potential for renewed tensions is high and underlying geopolitical concerns are unlikely to evaporate as a result of one joint statement. Another flare-up in geopolitical concerns would ultimately see investors flock back to the relative safety of yen assets.    

GBP: Sterling remains near a five-year trade-weighted high following a week of economic reports that bolstered the view that the BOE will lead other major central banks in monetary policy normalization. Strong employment figures, rising wages and in-line CPI numbers all kept alive the outlook for an early 2015 lending rate hike from the BOE and should continue to underpin the pound.

EUR: The euro remains near the upper end of recent ranges against the greenback, but has not been able to break out of the upper end of that range due to increasing talk of ECB monetary easing. While a dovish Fed and depressed Treasury yields will continue to limit any meaningful dollar gains, the euro should also struggle to push significantly higher as long the threat of ECB easing remains high. Any signs that a move by the ECB is becoming more imminent will weigh on the euro.

CAD: The loonie firmed against the dollar following slightly hotter than expected Canadian inflation data yesterday. However, given that much of the rise in CPI was due to higher energy costs, the figures are unlikely to have much influence on the outlook for BOC policy.