• Greek crisis still smoldering
  • UK election on Thursday
  • Canadian dollar likely to go lower
  • Bank of Australia meets tomorrow

When everyone bets on the same trade – the stronger dollar – then the market sets up for a sharp reversal, or “short squeeze,” as traders call it.  This is what happened early last week.

A string of bad economic news triggered a wave of dollar selling that continued until Friday.  On Tuesday, the April consumer confidence index plunged by 6.4 points to 95.2.  The next day, the early estimate for the 1st quarter growth rate came in near zero.

Previously bullish traders began to waver and sold dollars.  The dollar selling intensified until Thursday’s initial weekly jobless claims fell to a 15 year low, suggesting that the labor market was still heating up.  This was a surprise, and traders stopped selling.

On Friday, the dollar managed a small rally after the April Institute of Supply Management manufacturing index showed that manufacturing is holding up despite the strong dollar. The new orders also picked up nicely.

So where to go from here? All eyes will be on this Friday’s Employment Report.  If we see a strong pickup in hiring and hourly wage gains, then I expect the dollar to reclaim the last week’s short squeeze losses.  That said, we’ve two wild cards.  First, the crisis in Greece is still smoldering. Second, the UK general election is on Thursday.

In summary, I expect the week to be another roller coaster ride.

EUR-USD is near an 8-week high.  Early reports suggest that Greek bailout talks stalled this weekend.  Eurogroup’s next meeting is on May 11th, and I’m afraid Greece is playing another game of chicken. Stay tuned.

GBP-USD fell sharply on Friday after the April manufacturing activity index missed badly.  The index fell to 51.9 from 54.3.  I expect the pound to fall more this week. I’ve seen 100 to 200 point drops heading into tight elections.

USD-CAD rose as the US dollar regained its bearing on Friday. The April employment report will be released Friday.  I expect another solid report but it still may not be enough to make gains against the US dollar.

AUD-USD is lower because investors began to speculate on the Reserve Bank’s interest rate decision tomorrow.  The futures market suggests 50% odds of another rate cut.  I see 80% chance for the cut.  The bank needs to devalue the Aussie dollar to promote exports.

Have a great Monday!