Cracks in Foundation of USD Rally

A weak retail sales report sent the US dollar to fresh correction lows on a number of fronts. The Australian dollar was the top performer on the day while USD lagged badly. Japanese machine tool orders are due later. Ashraf issued issued a new EURUSD Premium trade with 3 new charts in addition to our existing trade. GBPUSD trade also remains +100-pip in the money, AUDUSD short was stopped out and NZDUSD remains in progress.

The year started out with market watchers extremely optimistic about US growth this year, especially relative to its developed-market rivals. When a relatively colder, snowier winter hit the United States it was seen as a minor setback. A similar spell of weather hit a year earlier warnings the US was slowing turned out to be false. Very few people lost faith in 'strong US & USD' story, including the Fed.

One of the foundations of the trade was that consumers would be spending more. Jobs were growing and the cherry on top was that lower gas prices would offer an extra boost. But the consumer is AWOL. March retail sales excluding autos, gas and building supplies were flat compared to +0.5% expected. It was the fifth consecutive month of softer-than-forecast retail sales.

Even worse, weather can no longer take the blame in April and analysts are struggling to find an excuse. At the same time, the US dollar trade is extremely crowded, particularly against the euro. After the data on Wednesday, USD fell 70 pips against the euro, yen and pound then continued to fall later.

What might be the most-worrisome signal of all was the Bund and Treasury yields only fell for moments after retail sales before the selloff resumed and then accelerated to fresh extremes. In the day ahead, watch the euro closely as it pushes up against the May high of 1.1392. A break could set off yet-another violent squeeze.

In the immediate term, traders will look to economic data from Japan. The machine tool orders report is due at 0600 GMT and is expected to show a healthy 14.9% rise in April. Still, it's not likely to be a market mover.