The 0.7% rise in US March retail sales, beating expectations of a 0.6% increase, following a sharp upward revision to 0.5% from 0.1% should help boost USDJPY towards the 119.70s as worries of a slowing US consumer have been alleviated for now. Sales ex autos rose 0.8% in line with expectations, while the February figure was revised to 0.4% from -0.1%.

The NY (Empire) Fed manufacturing rose to 3.8 in April, falling short of 7.3 expectations after the 1.9 in March, which was the lowest since May 2005. The employment component dropped to 5.4 from 11.4.

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.

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.

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