Dollar Trades Lower As Risk Aversion Recants Bullish Outlook
Despite a quiet economic calendar, the US dollar was on the retreat Tuesday against most of its major counterparts. For those majors that weren’t caught up in cross fundamental currents, the greenback selloff was partly a carry through on the single currency’s ongoing reversal of last week’s strong rally. There was also a more active component to the decline in the form of a general souring in risk appetite – but more specifically, American risk. Ben Bernanke and his fellow Federal Reserve policy makers have made a remarkable effort to head off a recession and stabilize the broad financial markets with a cumulative 325 basis points of rate cuts and unusual means for injecting liquidity into the frozen credit markets. In fact, after last week’s quarter point cut from the FOMC, the market is pricing in an 86 percent chance that the Fed Funds rate will be left unchanged at 2.00 percent. However, recent data has offered little reason to suspect financial conditions are improving nor that the economy would avoid a contraction in the second quarter. Today, an article on Bloomberg News quoting a study from Jupiter eSources LLC revealed bankruptcy filings among businesses rose 49 percent in the year through April – the most in a year. With individual filings included, the rise over the same period measured 31 percent. This highlights an often overlooked concern: that the Fed’s efforts haven’t been passed through to the consumer – a necessity if growth is to recover. Looking ahead to tomorrow fundamental activity picks up modestly with March pending home sales and credit spending. Both indicators have little market moving precedence.

Commodity Currencies Gain as Oil Touches New Record Above $122
The Australian, New Zealand and Canadian dollars all gained strength against the greenback today amidst higher commodity prices - particularly oil. In fact, crude rocketed during the US trading session to hit a new high of $122.73/bbl and settled at a record of $121.84/bbl. The gains only helped fuel the Loonie’s rally, which was initiated by the better-than-expected Ivey PMI release, as the index eased less than forecasted to 57.6 from 59.0. Indeed, the gauge is safely in expansionary territory above 50. Furthermore, a breakdown of the report shows that the employment component rose to a five-month high, which bodes well for this Friday’s Canadian labor market releases. On the other hand, the remaining data reflected a sharp jump in prices, a rise in inventories and a new four-year low in supplier deliveries. Meanwhile, the Reserve Bank of Australia left rates steady at 7.25 percent last night and RBA Governor Glenn Stevens noted in his monetary policy statement that domestic demand had started to cool, which lessens upside inflation risks. On the other hand, Stevens also said that “(t)he rise in Australia’s terms of trade currently occurring...will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the Bank has been assuming for some months now.” As a result, the RBA still maintains a hawkish bias, though they are widely expected to leave rates unchanged for the rest of the year.

Euro Treads Water – Will Euro-zone Retail Sales Disappoint?
The Euro failed to make headway across the majors, as the EUR/USD test of 1.56 in the morning was promptly rejected. Economic data for the region was light, as Euro-zone Services PMI was simply confirmed at 52.0 in April, indicating that the sector continues to hold up well despite widespread concerns that a US economic slowdown will severely impair expansion around the world. However, Wednesday’s release of Euro-zone Retail Sales may start to suggest just the opposite. Expectations are for a 0.2 percent monthly gain, but given the weak German spending figures we saw for the same period, there is a very good chance the Euro-zone headline reading could be very disappointing, adding bearish potential for the euro during the European trading session. Meanwhile, Swiss consumer price growth slowed to a 2.3 percent annualized pace in April, down from 2.6 percent in March. While record food and energy costs are keep inflation pressures robust, weakening demand for private services and durable goods are helping to counteract this trend.

British Pound Takes Another Short-Term Hit From Service Sector Data
The economic outlook for the UK took another fundamental hit this morning; and the jolt lead to another sharp yet short-lived drop for the pound. Headlining the otherwise barren docket was the CIPS PMI services report for the month of April. Typically, this indicator is met with only modest interest from the market; but with Europe’s second largest economy quickly cooling under the same forces that have brought the US to the brink of recession, traders have been more responsive to the leading indicators. The services activity report happens to a leading indicator for the country’s largest sector. Therefore, it is less of a surprise that the sharper than expected drop in the reading to 50.4 - its lowest level in five-years - was met with a more prominent market reaction. What’s more, the breakdown statistics suggested the sector may actually contract over the coming months. Outstanding business drop to a new low, while employment, new business and prices charged all declined. Most concerning though was the drop in expectations to its worst levels since the New York terrorist attacks in 2001.

Yen Crosses Mixed As Dow Recoups Losses to End Day Up 51 Points
After plunging at the market open on the multi-billion dollar losses reported by UBS and Fannie Mae – sending the Japanese yen higher across the majors – the Dow eventually finished the day in the black and above the 13,000 mark. As a result, the low-yielder ended the day almost completely unchanged versus the greenback, euro, and British pound but down against the booming comm dollars. There are no major Japanese economic reports this week, but traders should beware that risk aversion could reemerge market-wide once again.

Kathy Lien is the Chief Currency Strategist at FXCM.