Dollar and the Ugly Nature of US Data

• Dollar and the Ugly Nature of US Data
• EUR/USD Closes in on 2 Month Highs
• GBP Traders Take Cues from Data and Not BoE
• AUD: Beware of Jawboning from the RBA
• USD/CAD Closes Below 1.20
• NZD/USD Extends Gains Ahead of Key Data

Dollar and the Ugly Nature of US Data

Being a dollar bull in the current market environment is not easy with the greenback closing in on monthly lows against various currencies. There have been many negative surprises in recent U.S. reports and the few positive readings contained underlying weakness.  While non-farm payrolls rebounded in April, wage growth has been slow and this translated into softer consumer spending.  These disappointments have investors wondering which to believe - the data or the Fed.  Most U.S. policymakers are still throwing their support behind a 2015 rate hike and even the doves are calling the deterioration in data transitory.  They expect the economy to gain traction in the second half of the year but trusting their positive outlook is growing more difficult by the day. According to the latest report, retail sales growth stagnated last month after rising 1.1% in March.  Lower gas prices contributed to the miss but if we exclude these and auto purchases, spending still rose by only 0.2% significantly lower than the 0.6% forecast. First quarter consumer spending is off to a very weak start and that has led to a decline in the dollar, drop in Treasury yields and reduced expectations for Q2 GDP growth. Import prices also fell for the third month in a row by 0.3%, a sign of nonexistent inflationary pressures.  We never believed that the Fed would raise interest rates in June and we are still looking for tightening in September but until we see a consistent improvement in U.S. data, the dollar may have a hard time finding buyers.  Producer prices and jobless claims are scheduled for release tomorrow and after low readings for 2 straight weeks, a bounce is expected. 

EUR/USD Closes in on 2 Month Highs

The euro soared today versus the U.S. dollar, rising more than 1.3% on the back of stronger Eurozone and weaker U.S. data. This is the type of fundamental story that drives 1% moves in currencies.  The Eurozone economy grew 0.4% in the first quarter up from 0.3% in Q4.  While the increase was small, considering the challenges facing the region in the first 3 months of the year, the pickup in growth is encouraging especially when considering that France grew faster than Germany and Italy experienced its first quarter of growth since Q3 of 2013.  The 0.3% expansion in the Eurozone's fourth largest economy was also the strongest since 2011. The weakness of the euro played a very large role in the recovery as Quantitative Easing only began at the end of the quarter.  The latest move in the EUR/USD has taken the currency pair above the 100-day SMA and the 61.8% Fibonacci retracement of the record high and low. The next level to watch is 1.15.  While we remain weary of Greece and its 1.5 billion loan payments coming due in in June, for the time being, the momentum is on the side of the euro.

GBP Traders Take Cues from Data and Not BoE

Sterling traded higher versus the U.S. dollar today but moved lower against the euro.  This divergence in the pound's performance reflects the inconsistent signal provided by the Bank of England and UK data. In contrast to the Fed officials who have been calling for liftoff this year in the face of weakening data, the Bank of England tempered the market's expectations for tightening as wage growth accelerate.  In this Quarter's Inflation Report, the central bank cut its growth forecast for the year and next and warned that inflation could fall below zero before rising again. While the BoE is next in line to raise rates behind the Fed, it is looking more and more likely that they want to raise interest rates in 2016 and not 2015. U.K. data on the other hand continues to be firm with average weekly earnings rising at 1.9% versus the 1.7% forecast.  Jobless claims dropped less than anticipated but the unemployment rate fell to 5.5% from 5.6%.  Considering that inflation is nonexistent, the increase in wages is a net gain for U.K. consumers. With GBP/USD trading at its strongest level in nearly 6 months, the next stop should be the 38.2% Fibonacci retracement of the 2009 to 2014 rally at 1.58 followed by 1.60.

AUD: Beware of Jawboning from the RBA

All three of the commodity currencies performed well today but the strongest gains were enjoyed by the Australian dollar.  In fact, AUD was the day's best performer, rising as much as 1.5% versus the U.S. dollar. The Reserve Bank of Australia is not going to be happy with the rapid rise in the currency. Over the past month, AUD rose more than 6% versus the U.S. and New Zealand dollars and over 5% versus the Japanese Yen.  From Governor Stevens' past comments, we know they want to see the exchange rate closer to 75 cents and not 81 cents, where it is right now especially given the latest round of Chinese data.  Retail sales growth dropped to 10%, the slowest pace of growth in more than a decade and industrial production growth slipped to 5.9%. While this was stronger than the previous month, it was weaker than anticipated.  As a result, AUD/USD traders should expect jawboning from the RBA in the near future.  The New Zealand dollar also performed well after the RBNZ failed to reinforce the market's expectations for easing.  Business PMI and retail sales figures are scheduled for release this evening. USD/CAD closed below 1.20 for the first time in 4 months following stronger than expected housing data.