Why are Investors Selling Dollars?

It is almost hard to tell if investors are pro or anti-dollars because while USD/JPY rose within a few pips of 113 today, EUR/USD hit a fresh 1-year high of 1.1445.  Granted USD/JPY came off its highs and ended the North American trading session near 112, U.S. 10 year yields hit 1 month highs.  The sharp rise in U.S. rates should be attracting investors but with other major central banks also talking about tightening, investors are looking for opportunities elsewhere.  Today's dovish comments from Fed President Bullard and GDP revisions put a lid on the dollar's rally. Bullard said what everyone is thinking, which is the Fed is raising rates against a backdrop of relatively weak growth and downside inflation surprises.  First quarter GDP growth was revised up to 1.4% from 1.2% on the back of stronger consumer spending but core PCE was revised down to 2% from 2.1%.  Jobless claims also increased to 244K from 242K.  As U.S. data casts doubt on the Federal Reserve's hawkishness, Fed fund futures show investors divided on another hike this year - the odds of tightening in December hover right around 50%.  With average hourly earnings and retail sales falling, we don't expect Friday's personal income and spending numbers to help the dollar.  In other words, the risk is to the downside for USD/JPY which could sink back down to 111.   

EUR/USD on the other hand has its eye on 1.15. The European Central Bank attempted to talk down the currency yesterday by saying the market misjudged Draghi's comments but the warning fell on deaf ears as investors sent euro to fresh highs.  Today's rally was supported by better than expected data - confidence in the Eurozone increased in the month of June according to the latest reports and inflation rose 0.2%, taking the year over year rate back up to 1.6% (economists had anticipated another month of slowdown). Tomorrow's German retail sales report is also expected to show an improvement but the country's labor data could fall short of expectations as the PMIs report the weakest rate of job creation in 5 months.  Even so, if U.S. data misses, the EUR/USD could hit 1.15. 

It was a good day for sterling, which traded higher against all of the major currencies with GBP/USD breaching 1.30 for the first time in a month.  The unexpected hawkishness from Bank of England Governor Mark Carney injected new life into the currency and with Prime Minister May surviving the Queen's vote, one major uncertainty for pound has been eliminated.  Many investors feared that Labour would try to strike down the new minority government, putting May's job at risk but by an ever small margin she managed to corral enough votes to approve the Queen's speech.  Net consumer credit and mortgage approvals also increased, supporting the rally in the currency.  Tomorrow, revisions to first quarter GDP and the current account balance are scheduled for release.  We see fewer revisions to UK GDP than U.S. GDP and for this reason the focus should be on U.K. rates.  Yields have turned sharply higher allowing GBP to hold onto its gains versus the euro and U.S. dollar.  We like selling EUR/GBP on rallies and believe the pair is near a top.

The relentless uptrend in the Canadian dollar took USD/CAD to its lowest level in 4 months. Thanks to the rebound in oil prices and the Bank of Canada's consistent hawkishness, the Canadian dollar saw gains 5 out of the last 6 trading days.  While USD/CAD is now in oversold territory, the pair could see one more push lower on the back of Friday's GDP report.  Economists are looking for slower growth but the 0.8% rise in retail sales and the narrowing of the trade deficit in the month of April points to stronger growth.  With that in mind, after such a robust move, we should see end of week profit taking after the market digests the GDP report on Friday.  There's support in USD/CAD between 1.2950 and 1.2970.  The rebound in iron ore and copper prices helped take the Australian dollar to a 2 month high versus the greenback but the New Zealand dollar failed to participate in the comm dollar rally even though the ANZ's activity outlook and business confidence reports ticked sharply higher.  It is hard to find a cause for NZD's underperformance outside of possible AUD/NZD buying as that's currently the primary driver of NZD flows.