The G7 statement??™s focus on alleviating protectionism and resurrecting multilateral trade negotiations overshadowed the focus on yen weakness. Unlike in the February G7 meeting when yen weakness was the primary focus, this weekend??™s meetings and press conferences in Washington did not address the renewed weakening in the currency. The Japanese yen has lost over half of the gains sustained in February-March and is now in back to fresh record lows against the euro and 2-month lows against the dollar and sterling.

This should further boost traders??™ return towards yen-based carry trades, which will only raise the risk of renewed episode of sharp carry yen unwinding, that could be accompanied with fresh declines in equities and commodities as was seen in 9 weeks ago. Specifically, Gold is trading at $688 per ounce, the highest level since February 27 (the day it plunged by $30 when world bourses plummeted).  This week??™s US data on retail sales will be especially essential in impacting the latest return in risk appetite. 

Specifically, the return to carry trades is fuelling the British pound to its highest level against the dollar in 14 1/2 years at $1.9939. The Aussie is at a fresh 17 year high at 0.8357.

Also along G7 lines, remarks from IMF Managing Director Rato indicating the dollar has more room to fall just a few days before the G7 meeting in Washington were also taken as a green signal for further erosion in the US currency. The dollar??™s latest episode is triggered by a combination of increased signs of further rate hikes from the ECB, rising metal and fuel prices boosting the commodity dependent currencies of AUD and CAD and robust activity in the UK.

Retail sales may boost fresh risk appetite

Today??™s release of the US retail sales due at 8:30 am EST is expected to show a 0.6% rise in March from 0.1% in April, with core ales (sales ex autos) seen up 0.9% from -0.1%. Above normal weather temperatures in March were part of the reason to the sharp rebound, while higher gasoline prices are also seen as a contributing factor. In the event that sales meet forecasts, risk appetite is likely to be further reduced a reaction is that will most likely reflect on fresh declines in the Japanese currency. This could call up the 120 yen figure in USDJPY, the highest level since February 27 ??“the day world bourses began their sell-off the yen started its 5% jump.

Also due at 8:30 am EST, is the NY (Empire) Fed manufacturing survey, expected to have risen to 7.3 in April following 1.9 in March, which was the lowest since May 2005  A rebound would be instrumental in shoring up confidence in dollar pairs, especially in the event that retail sales show their expected bounce.

At 9 am are is the TICS report on international capital flows into the US, expected to have shown an increase in total net inflows to $80 billion from $74.6 billion, and a drop in net long term securities to $70 billion from $97.4 billion. We could see prolonged foreign interest in US equities due to the record breaking levels in equities in February before the selloff began in February in 27, which may not be captured in the February data.

The Homebuilders Survey, due at 1 pm EST , will be closely watched for the latest on the housing market. The April index is expected to have dropped to 35 from 36 in March and 39 in February. Rising sub-prime defaults are expected to have contributed to the decline in the index. A figure below 34 could be instill fresh negativity in the market, especially in the event that retail sales fail to meet expectations.

EURUSD remains propped by growth upgrades

Fresh record highs in the euro against the yen as well as continued growth upgrades for the Eurozone and Germany are helping to further boost the EURUSD to fresh 2-year highs at 1.3577. Strong industrial production from the Eurozone last week and today??™s confirmed CPI at 1.9% in March opens the door for the elusive 1.36 target last reached in December 2004. A strong reading in US retail sales may trigger some temporary profit-taking towards the 1.3480s, but traders will pause before the Homebuilders survey at 1 pm.

The bigger negative risk to the pair may occur in the event of a renewed episode of carry trade unwinding, in which case a falling EURJPY will weigh on EURUSD as was seen in March. With the disparity between the US slowdown and renewed records in world bourses, the risks are on the rise. EURUSD interim support stands at 1.3520, followed by 1.3480. Upside targets stand at 1.366 and at1.3630.

USDJPY lifted by G7 yen silence

The G7 silence on the yen??™s renewed weakness coupled with Japanese officials??™ cautiously optimistic outlook is opening the way for renewed carry trades in the yen. The chase to higher yields is also taking part in the Aussie and sterling. While we see the possibility for USDJPY to recapture the 119.80s and the 120.10 figure, the risks to the downside are increasing in the midst of an expected weakness in US and US earnings seasons and general weakness in US data. Upside capped at 119.70 followed by 119.90 and 120.20. Support crops up at 119.00, followed by 118.60 and 118.20.

Sterling at fresh 14 ?? year highs, rate hike seen apporaching

The aforementioned return to global carry trades fuelling higher yielding currencies, commodities and equities is boosting the pound sterling across the board. The 1.2% rise in March PPI beating forecasts of 0.9% and the 15% rise in April house prices from Rightmove should open the door for a May rate hike, which would push UK rates to 5.50%, above US rates for the  first time since January of last year. Resistance seen at 1.9960, followed by 1.9990. Support stands at 1.99, backed by 1.9870.