Will Friday data disappoint FX traders?

Friday will be a busy day for forex traders with PMIs and retail sales reports scheduled for release from all corners of the world. Currencies are trading strongly ahead of these reports with investors looking forward to good data. The best performing currencies were the Australian and New Zealand dollars. Although Australia reported job losses instead of job gains in the month of April like economists anticipated, traders were encouraged by a lower unemployment rate and full time job growth.  Retail sales and PMI numbers are due from Australia tonight and a further pickup in economic activity is likely. Treasury Secretary Kennedy expressed confidence in the economy when he said yesterday that “Australia’s economic recovery is stronger than many other countries.”
 
After selling off briefly on Wednesday, the Canadian dollar headed back towards 6 years against the U.S. dollar. Traders looked past the decline in oil prices to the rise in house prices and ADP’s report of private sector job growth in April.  With that said, the risk for Canadian retail sales tomorrow is to the downside because most of Canada was in lockdown last month and most provincial governments don’t expect to lift restrictions until next month.  Ontario recently extended their emergency province wide lockdown until June 2nd, Nova Scotia to mid June and in British Columbia indoor dining remains closed. The Canadian dollar is one of the strongest currencies but weak spending numbers could be a reality check for the loonie that would trigger a sharp short squeeze in USD/CAD.
 
European currencies also traded higher against the greenback with EUR/USD recapturing 1.22. After seeing the German ZEW and IFO reports moving higher, we expect stronger PMIs. Unlike Canada which remains in lockdown, many euro area nations relaxed restrictions this month. Economic activity is expected to pick up significantly and the PMIs will be the first reports to reflect these improvements. We also anticipated stronger U.K. PMI and retail sales numbers. The U.K. is on track to end all remaining pandemic restrictions on June 21st. With the weather improving, May should have been a very good month for spending and business activity. If both reports surprise to the upside, GBP/USD should burst run above 1.42.
 
The U.S. dollar traded lower against all of the major currencies as Treasury yields declined, giving up all of yesterday’s gains. While policymakers said taper talk could begin in June recent data disappointments will delay actual changes. The Philadelphia Fed index tumbled sharply in the month of May from 50.2 to 31.5. Economists anticipated a decline but not by this magnitude. Jobless claims rose less than expected but continuing claims ticked higher. While no one will question the durability of the U.S. recovery there also hasn’t been any evidence of the momentum accelerating. So if tomorrow’s economic reports show the global recovery gaining traction money could flow out of dollars into other riskier growth oriented currencies.