US Dollar: The Best of the Worst?

The US data released today was weak, but the reaction in the dollar has been limited. The lowest level of existing home sales in 10 years and the highest level of jobless claims since March only drove the dollar lower against the Japanese Yen. The greenback held onto its recent gains against the other major currencies such as the Euro, British pound, Australian and New Zealand dollars as the US dollar is the best of the worst which seems to be the theme of the day. Existing home sales continue to paint a gloomy picture for the housing market while jobless claims confirm that there will be further losses in non-farm payrolls next week. However a continual deterioration in the US economy has been priced into the market while the severity of the recent misses in UK and Eurozone economic data have been a big surprise. The fear now is that the pace of deceleration will be a lot worse for our friends across the pond. After consistent gains since last Wednesday, the stock market has plunged which has weighed on all of the Japanese Yen crosses and high yielding currency pairs. There is also a story in Reuters citing G7 sources as saying that Europeans want the Federal Reserve to raise interest rates in order to prop up the value of the dollar. Although the article also indicates that the Europeans concede that they are unlikely to get their wish, this is certainly helping the US dollar keep its head above water. Durable goods, consumer confidence and new home sales are due for release tomorrow. The market that will have the biggest reaction to the data will be equities, which by extension will impact USD/JPY. In contrast, EUR/USD and GBP/USD traders will have to consider who has the direr outlook, the US, Eurozone or the UK.

Euro Extends Losses on Disappointing Data

The Euro continued to sell-off against the US dollar as incoming data tests the rigidness of the European Central Bank. Since the last ECB meeting, monetary policy officials have been nothing but hawkish despite the fact that the region’s economy is weakening by the day. The German business confidence index has plummeted below the 100 mark as reported by the IFO index to the weakest level in 3 years. The same sort of deterioration was seen in the French business confidence index. Service and manufacturing PMI indices for the region as a whole remain in contractionary levels. Even the Eurozone current account surplus turned into a deficit in the month of May, reflecting the difficult conditions across the region. With oil prices holding at $125 a barrel, the ECB may be forced to reduce their degree of hawkishness, which would weigh further on the Euro. There is no major data due from the Eurozone data tomorrow which leaves the price action of the Euro dependent upon US data and market sentiment.

British Pound Gets Killed by Retail Sales

The British pound came under aggressive selling pressure following the sharpest drop in UK retail sales in 22 months. Slower global growth, a deteriorating labor market and rising prices is taking a big toll on consumer spending. This will have a big affect on UK businesses and GDP growth in the second quarter. The advance release is due out tomorrow and based upon today’s retail sales number, GDP growth won’t be pretty. Despite the hawkish tone of the Bank of England minutes, there is no way that the BoE will risk raising interest rates in the near future. In today’s UK Telegraph, there is an article about how the Bank of England has room to cut interest rates. According to a key Treasury Adviser, the neutral level of interest rates is now below 5 percent. If the UK economy continues to deteriorate, as widely expected, the pressure on the Bank of England to cut interest rates will grow, especially if oil prices remain at current levels.

Selling Continues for New Zealand, Australian and Canadian Dollars

The selling pressure continues to intensify for the New Zealand, Australian and Canadian dollars. Of all of the G10 currencies, we are most bearish the New Zealand dollar. The Reserve Bank of New Zealand has now become the most aggressively dovish central bank of the G10 after announcing that more rate cuts are to come. The futures curve is now pricing in a 100 percent probability that rates will be reduced at the next monetary policy meeting. The central bank has become serious about recessionary risks and even though their measures will help the New Zealand economy in the long run, in the short term, we expect the New Zealand dollar to hit 70 cents against the greenback and breach 1.30 against the Australian dollar. The Australian and Canadian dollars are also lower even though gold and oil prices have held steady. For Canada, the rise in oil prices has masked underlying weakness in exports which means that if oil prices stay at current levels, we could start seeing serious weakness in Canadian data.

Dow Falls 283 Points, Japanese Yen Crosses Tumble

All of the Japanese Yen crosses including USD/JPY have crumbled under the weight of the US stock market. The Dow Jones Industrial Average dropped more than 283 points, erasing the past week’s gains. The move in equities today was too big for international investors to ignore which is why none of the traditional carry trades have escaped unscathed. The Japanese trade surplus was narrower than expected, reflecting the slowdown in exports. Bank of Japan Mizuno expressed concern about a further deterioration in the economy, which is well warranted. Consumer prices are due for release tonight along with the corporate goods price index. Although this will matter for the Yen, it won’t matter as much as the move in the Nikkei, so keep an eye on Japanese stocks.

Kathy Lien is the Chief Currency Strategist at FXCM.