Dollar Rallies After Better Than Expected GDP

Today, the U.S. dollar recovered from yesterday’s losses after a government report showed that the U.S. economy expanded faster than previously estimated. In the second quarter of 2008, Gross domestic product increased at a 3.3 percent annual pace, compared with an initial estimate of 1.9 percent, the Commerce Department said today in Washington. The U.S. economy has been helped by a favorable exchange rate of the U.S. dollar against its major trading partners and a surge in exports contributed the most to U.S. growth in almost three decades. In fact, during Q2 of 2008, the U.S. trade deficit narrowed to $376.6 billion and added 3.1 percentage points to growth, the most since 1980. Yet, beyond some improvements on international trade, the U.S. economy remains relatively weak. Today, the U.S. Labor Department said that 425,000 Americans filed initial claims for unemployment during this week, well above the 321,000 average of last year. This brings the total number of people unemployed but actively looking for a job to more than 3.4 million, the highest number since November 2003. Nonetheless, the rapid weakening of economic growth outside the United States is likely to continue to help the U.S. dollar. Indeed, a more accommodative monetary policy could be needed to prevent Europe from falling into a recession and lower interest rate differentials could make the euro and the sterling less attractive to foreign investors.

Euro Has A Second Change At Event Risk With Inflation Expectations

With heavy-hitting economic data populating the European economic docket, event risk traders were ready to dive into the market Thursday. However, with the data coming in at opposite ends of the spectrum and a major US release breaking the fundamental flow, there would end up being no consistency to the euro’s price action Thursday. Looking at the data triggers from the docket this morning, we began with a bullish tone. German unemployment dropped four times faster than economists had expected. The number of jobless tumbled by 40,000 to 3.2 million – notably shrinking the jobless rate to a 16-year low 7.6 percent. While this was clearly a strong report, market participants seemed less than impressed. As the 32nd monthly contraction in joblessness, improvements in this area of the economy seemed to be priced in for the foreseeable future. What’s more, with business confidence at a three-year low and the German economic contracting through the second quarter, it seems only a matter of time before labor trends follow suit. Consumer spending seems to have already succumbed to the economic malaise with the German retail PMI number slipping to an 8-month low just minutes later. Looking ahead to Friday, the euro may not go quietly into the weekend. After most of its major member economies have released their respective employment figures, Euro Zone officials plan on reporting labor health for the entire region. More interesting though is the EZ CPI estimate. With ECB members calling market speculation for a rate cut premature, traders will want to find some confirmation on the presence of inflation. And, even though consumers have a habit of over stating the outlook for their cost of living, the consensus is looking for the estimate to pull back from its more than 12 year high.

Pound Fundamentals Deteriorate Fast As The Currency Pushes 13 Month Lows

The health of the UK economy seems to deteriorate with each economic release – the British pound is paying for it. Today, the currency dropped to a fresh 13-month low against its US counterpart while testing a major level of support read in a 38.2 percent retracement of a seven year trend at 1.83. And similar to today’s price action representing just another step forward in a nine-month trend, the event risk crossing the wires seemed just further confirmation that the economy was sinking quickly. The morning’s activity began with the Nationwide Housing Price data for the August. The second of the major residential inflation indicators for the month, the indicator reported a drop in home prices that was more aggressive on a monthly and annual basis than the markets were expecting. With the BoE in mind, the 10.5 percent deflation through the year (the fastest pace of contraction in 18 years) is certainly the more pressing number. Later in the London session, the CBI retail data proved there was reason to doubt the ONS’s report of a rise in retail sales through July. The less volatile report revealed sales activity was the weakest it has been in 25 years. With UK activity tumbling and the US data finally showing signs of improvement, GBP/USD’s direction comes as little surprise.

Oil Drop Competes With Canadian And Australian Data For Forex Action

The Commodity Bloc was volatile Thursday. Influencing the Canadian, Australian and New Zealand dollars equally was a sharp drop in key raw material prices. The Reuters/Jeffries CRB Commodity Price Index dropped 1.9 percent with notable contributions from industrial metals, agriculturals and the energy complex alike. A particular driver for the loonie and Aussie dollar though was the pull back in crude from $120.50/barrel to below $116 after the IEA chief said he would release strategic reserves in the US should Tropical Storm Gustav disrupt production in the Gulf of Mexico. As a market driver, oil’s volatility was certainly a headliner; but it wasn’t the only influence for the commodity bloc. From Australia, event risk traders were taking in the business investment report for the second quarter and the Conference Board’s leading economic index. The private investment gauge doubled expectations with its jump, but the growth forecast in the composite was more interesting. Forecasting a decline in growth for a fifth consecutive month, this data certainly supports expectations of a 25bp rate cut from the RBA next week. Out of Canada, the 2Q current account balance came up short thanks to a drop in investment income flows. Looking ahead to tomorrow, the Canadian docket will offer the top event risk for the day with a second quarter GDP number.

Yen Looks To Key Japanese Data For Action As Long As Carry Is Quiet

There was a lot of cross currency activity jostling the risk-sensitive yen crosses Thursday; but a global rally in equities and pull back in fear indicators (like the VIX) helped to steady currency. For fundamentals from Japan, a report from the Ministry of Finance reported Japanese investors netted their biggest weekly sale of foreign debt since at least 2001 in the period through August 23rd on fears of ongoing FX volatility and a potential bank collapse in the US. Over the final trading hours for the week, the economic calendar will heat up. Indicators for employment, consumer spending, factory activity and inflation will take an in depth reading of the economy’s health.

Antonio Sousa is a Currency Analyst for FXCM.