Strong US Retail Sales fails to break final USD resistance levels. US CPI on tap today ahead of weekend's G-8 meeting.

Crude oil not making it easy on the greenback. Range break needed soon for continued USD strength.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Apr. Retail Sales rose 1.0% vs. 0.4% expected, but ex Autos fell -0.5% vs. +0.2% expected
• China May Retail Sales rose 21.6% vs. 21.7% expected
• Japan Bank of Japan kept interest rates unchanged at 0.5% as expected
• Japan May Consumer Confidence fell to 34.1 vs. 35.0 expected and 35.4 in Apr.
• France May Bank of France Business Sentiment out at 97 vs. 100 expected and 100 in Apr.

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• Canada Apr. Manufacturing Shipments (1230)
• Canada Q1 Labor Productivity (1230)
• US May CPI (1230)
• US June preliminary University of Michigan Sentiment (1400)
• (Saturday) US Treasury Secretary Paulson to host G-8 Press Conference (0500)

Market Comments

The votes are to be tallied today for yesterday's Irish referendum on the Lisbon treaty. Again, the headlines are trumpeting the idea that the entire EU project could be in doubt on a No vote (which has reasonable odds as No voters tend to be far more motivated than the Yes voters - who are really mostly "I don't really understand or care" voters.). A clear rejection of the treaty could trigger further Euro weakness in the short term, but any effects of this are likely to be ephemeral. The EU will figure out how to wriggle its way out of any dilemma caused by a No vote. Those who make the rules can change them if they don't fit the situation. Some countries may prove more equal than others.

Yesterday's strong US Retail Sales gains can likely be attributed to the tax rebate checks sent out recently and perhaps also improper calculation of inflation. The headline and ex-Autos and gasoline numbers all beat expectation and previous months' numbers were also revised up. This cannot be sustainable if we look at the state of consumer confidence in the US and the price of gasoline, which has risen over 60% since last summer. The US consumer will have to retrench. Regardless, the retail sales data yesterday failed to give the USD much of a boost. It seems the market is only movable on Central Bank rhetoric or factors that feed directly into it - like today's CPI. Let's see if a higher than expected CPI figure can trigger a break of the range for the USD and a move to the next resistance levels (1.5000 in EURUSD, for example.) A failure to break soon to the downside soon would begin to strongly increase the odds that we end up staying in the range much as we did back when EURUSD traded between 1.4300 and 1.4900 for 2 months back in November-February.

Again, we note the very negative news on the financial front and wonder at the amazing lack of worry in government bond markets and the "worry currencies" like JPY and CHF. Lehman is now on the auction block, credit spreads are blowing out again, and equity market volatility is spiking. Yet the inflation obsession continues to dominate at the moment, and bonds keep heading lower and JPY and CHF can't get any kind of rally started. Are we the only ones noticing the dark clouds out there?? The key for the USD in the coming days/weeks will be how it deals with the market waking up to risk once again, if it indeed does so. The inflation obsession appears overdone. We also note the rise in the average of the US initial weekly jobless claims data in recent weeks - as the US unemployment rate is likely to continue to push higher to at least 7% by early 2009.

This weekend's G-8 meeting will focus on food and inflation problems, and a US treasury official already pointed out that central bankers will not be at the meeting and that currency levels are not a formal part of the agenda. Nonetheless, now that the Fed and the Treasury are showing coordinated signs of wanting to defend the value of the USD, we should be scan for any statement of interest on the currency front, as the USD will be discussed.

Chart: USDJPY
A big resistance level has arrived for USDJPY at the 40-week moving average coming in around right at yesterday's high just above 108.10. Above that we have the old low at 108.97 as the next resistance level of interest. A return to risk aversion could see the JPY stronger across the board. As shorting here is like trying to catch a falling knife, one might look to buy put spreads or ratio put spreads in USDJPY or EURJPY if betting on the inflation hysteria to ease and risk aversion reasserting control.