Dollar - 7 Straight Years of Gains

May has been a great month for the U.S. dollar.  The greenback traded higher against all of the major currencies with its gains ranging from 1% against sterling to nearly 5% against the Australian dollar.   Thanks to these moves the broader Dollar Index is up over 3.25%, marking the 7th straight year of gains in the month of May.  The losing streak also continued for EUR/USD, which shed more than 2.5% of its value this month.  The impact of seasonality was particularly powerful this year and even as the dollar bids goodbye to a strong month with mixed performance, the outlook remains bright.  Profit taking drove the dollar lower against the Japanese Yen, Australian and New Zealand dollars but the greenback marched higher versus the euro, sterling, Swiss Franc and Canadian dollar. This morning's U.S. economic reports were mixed with stronger personal spending and house price growth offset by weaker consumer confidence and manufacturing activity in the Chicago region. Tomorrow's ISM Manufacturing report may not be kind to the dollar but the Fed's Beige Book should ease concerns with the overall economy performing well enough for the Fed to push the idea of tightening this summer.  The dollar remains a buy on dip and we particularly like USD/JPY between 110.50 and 110.70.

Tonight the focus will be on the Australian dollar with Chinese PMIs and first quarter GDP numbers scheduled for release. Last night the Australian dollar soared after a report showed that net exports rose 1.10% in the first quarter.  Not only was this stronger than expected but exports is a key driver of growth so the positive surprise led many economists to upgrade their GDP forecasts. Building approvals also increased 3% against expectations for a 3% decline, encouraging today's gains in AUD.  While we are optimistic about tonight's GDP report, Chinese PMI numbers are also scheduled for release and the outcome could dilute the market's reaction to Australian data.  The best-case scenario for AUD would be if Chinese manufacturing activity accelerates and GDP beats but if Chinese PMI misses, it could overshadow Australian growth.  The worse case scenario for AUD would be if AU GDP growth falls short of expectations and Chinese manufacturing activity slows. 

NZD, today's best performing currency will also be affected by Chinese data but the focus for New Zealand dollar traders will be on tomorrow's Global Dairy Auction. Prices increased at the last auction and another rise would help the currency recover more losses. However Fonterra recently raised its milk payout by less than expected because of a strong currency, global over-supply, international inventory levels and the economic outlook for major dairy importers.  If these concerns are valid then milk prices should decline. 

USD/CAD extended its gains for the third consecutive trading day above 1.3100 on the back of lower oil prices and weaker GDP growth. According to the latest reports, the Canadian economy contracted -0.2% in the month of March, with year over year growth falling to 1.1% from 1.4%. Not only was this data significantly worse than expected but first quarter growth also fell short of expectations.  With retail sales falling and Canada's trade deficit hitting record levels, the slowdown should not be surprising.  Meanwhile oil prices broke and then rejected $50 a barrel ahead of Thursday's OPEC meeting.   The recent recovery in oil prices reduces the chance of a production cut.  Iraq's OPEC envoy has already said that there is no specific proposal on production in the agenda but even though no changes are expected, the official announcement could still drive prices lower.  As such, we view pullbacks in USD/CAD as buying opportunities.

The least interesting currency was euro, which ended the day flat against the U.S. dollar. The surprise decline in German retail sales was offset by fewer unemployment claims and a much better jobless rate.  More specifically, the unemployment rate fell to its lowest level on record, which is encouraging for the European Central Bank who meets on Thursday.  We continue to see areas of strength in the region's 2 largest economies but the periphery is suffering and that will make it difficult for the central bank to develop a clear outlook. Chances are they will maintain a wait and see mode with a warning that more easing could be in store if the U.K. referendum wrecks havoc on the financial markets.

The worst performing currency today was sterling, which fell sharply against all of the major currencies.  The sell-off was driven by a new Brexit poll that found the vote tighter than previously reported. According to ORB, 51% of Britons polled favored leaving the European Union versus 46% who favored staying.  The U.K.'s manufacturing PMI report is scheduled for release tomorrow and we are looking for a rebound but Brexit headlines will continue to dominate sterling flows and will overshadow the report just like last month.