The Weakest Currency of Them All...

With US equities rebounding for the third day in a row, the greenback traded higher against all of the major currencies. Better than expected US economic reports certainly helped as housing starts and building permits recovered from last month's declines. Manufacturing activity in the Philadelphia region also accelerated more than expected while jobless claims fell. Good data helps to ease some concerns about how the US economy is doing, but they do not mitigate our broader worries for growth. Yesterday's retail sales report was very weak and this deterioration will reverberate throughout the economy. The University of Michigan's consumer sentiment report is scheduled for release on Friday and it is difficult to imagine how sentiment could improve with trade tensions worsening and stocks falling more than 2% this month. We still look for the rally in USD/JPY to fizzle between 110.50 and 111.00.

The rising dollar turned all of the major currencies lower but the weakest of them all is sterling. While it would be easy to attribute the decline to growing calls for Prime Minister May's resignation, even after today's talks she plans to remain in office until Parliament signs the Withdrawal bill. The bill could be resubmitted for vote next month but it still does not have enough support to pass. Instead, investors are growing increasingly concerned about the toll of Brexit. We saw evidence of that in this week's employment report as jobless claims increased and average weekly earnings growth slowed. With the trade war intensifying, there's no upside for the UK in the near term.

The Australia dollar dropped to 4 month lows today on the back of disappointing labor data. Although 28K jobs were created last month, which was more than the consensus forecast, investors were not happy that all of those jobs were part time. Full time jobs fell -6.3K, pushing the unemployment rate up to 5.2%. The Reserve Bank of Australia refrained from cutting interest rates last month but at the time they had nothing positive to say about the economy. The only reason why they chose to wait was because they wanted to see how US-China trade negotiations would play out. Now that we know the result, they will have no choice but to ease and their decision will be reinforced by these latest numbers especially as consumer inflation expectations dropped to their lowest level since November 2016. There is no major support level for AUD/USD until the flash crash low of .6750. The New Zealand dollar followed AUD lower ahead of tonight's manufacturing PMI and PPI reports. Given the RBNZ's dovishness a softer number is expected. USD/CAD extended its gains despite an uptick in manufacturing sales and higher oil prices.

Last but not least, EUR/USD fell to a 7 day low. While the pair did not hit a major milestone like GBP or AUD, the move is significant because it represents a clean rejection of the 50-day SMA. EUR/USD tried to close above 1.1250 three times in the past three weeks with no success. This week's decline confirms that the downtrend remains intact and the pair is poised for a move below 1.11. Fundamentally, even if the auto industry is spared tariffs for the time being, it will be very difficult for Germany to maintain a recovery when China is slowing. Investors know that and the ECB knows that. When the details of the new TLTRO program are released next month, they could be accompanied by a promise for more action if the region's economy slows further.