USD: Retail sales could be a weak link for the dollar We are a little surprised that FX markets have not shown some follow-through to the weekend news. Friday afternoon had started to see the Japanese yen and Swiss franc fare a little better on news that Iran could stage a direct attack on Israel within days. At the same time, Brent crude traded to $92/bl, and US two-year Treasury yields caught a bid. All typical risk-off, flight-to-quality trades. In the end, Iran's much-anticipated attack did materialise. The direct attack was at the more severe end of possible responses (the alternative for Iran would have been to use regional proxies), yet the damage to Israel - especially to civilians - seems to have been minimal. With Western allies urging restraint, the market is taking the position that the Netanyahu government will avoid the more aggressive and escalatory responses of a direct attack on Iranian military or nuclear facilities. Yet it looks too early to conclude that Middle East tension has found some kind of new equilibrium, and we suspect implied FX volatility will stay better bid for some time. The episode also serves as a reminder that the dollar is the best safe-haven currency right now—offering liquidity, high yields, and protection from US energy independence. Returning to the global macro story, this week is a relatively light one for US data. The highlight of the week will be today's US March retail sales figures. Given that this data is presented in nominal terms, inflation will be driving part of the gains. And after last week's high US inflation data it is doubtful that any kind of weakness in retail sales data today can substantially move the needle on expectations for the Fed this year. Here the market seems comfortable pricing just under two cuts for the Fed in 2024. On that subject, we will hear from many Fed officials this week, and on Wednesday, the Fed releases the Beige Book ahead of the May 1st FOMC meeting. In all then there seems little reason for the dollar to hand back recent gains. DXY may be due some consolidation around 106 after some powerful gains last week - but the direction of travel looks to be 107. Chris Turner |