US Dollar Still a Laggard in Light of Fed’s Quantitative Easing Announcement, Surge in Jobless Claims

The US dollar remained extremely weak on Thursday following the Federal Reserve’s quantitative easing announcement on Wednesday. Indeed, the Federal Open Market Committee (FOMC) left their fed funds target range at 0.0 percent - 0.25 percent, as expected, and said that they would buy up to $300 billion worth of longer-term Treasury securities over the next six months in order to help improve conditions in private credit markets, and would also buy up to an additional $750 billion of agency mortgage-backed securities and increase purchases of agency debt by up to $100 billion.

The release of US economic data on Thursday morning certainly didn’t work in favor of US dollar strength either. Labor Department numbers were mixed, but the general sentiment of the results is decidedly disappointing. While initial jobless claims fell by 12,000 during the week ending March 14 to 646,000, continuing jobless claims jumped by 185,000 to 5,473,000 during the week ending March 7, the highest since record keeping began in 1967. The increase signals that the unemployment rate is likely to continue rising from its latest reading of 8.1 percent toward the top of the Federal Reserve's 2009 forecast range of 8.0 percent - 9.2 percent. Meanwhile, the Conference Board's leading economic index fell in February at a rate of 0.4 percent after rising in January. A breakdown of the report shows that the decline was led by the average workweek, jobless claims, stock prices, and consumer expectations. On the other hand, consumer goods orders, pace of deliveries, non-defense capital goods orders (business investment), and building permits all registered small improvements of less than 0.1 percent.

Finally, the Philadelphia Fed's measure of activity in the region's manufacturing sector rose to -35 in March from -41.3, and though this denotes an improvement, the negative readings in the headline and subcomponents all indicate that growth in the sector is still contracting. Indeed, prices paid/received, new orders, inventories, and number of employees all fell further into the red, signaling lower costs but tight profit margins, lackluster demand, and further deterioration in the labor markets. All told, the US manufacturing sector is being hit particularly hard by the recession as both domestic and foreign demand wane.

Euro, British Pound Surge Against US Dollar, but Former Remains Stronger on UK’s Quantitative Easing

The euro and British pound have been big beneficiaries of the US dollar’s weakness, but for what it’s worth, the euro is ultimately stronger than the British pound right now as EUR/GBP has made headway toward 0.9500. While both the European Central Bank and Bank of England want to avoid cutting rates to zero, there is big difference in their stance on quantitative easing. The UK has already started to do so, and while ECB President Jean-Claude Trichet said that the central bank was studying "additional non-standard measures," the ECB will have a much more difficult time embarking on quantitative easing, or as Trichet prefers to call it, “credit easing.” This is because there is no central Treasury for the Euro-zone, and thus, it will take substantial coordination to achieve the same actions.

Canadian Dollar Could Pull Back on Retail Sales Data on Friday

While the Canadian dollar ultimately ended the day up 0.59 percent against the US dollar, the currency showed very little response to the 7:00 ET release of Canadian inflation data, despite the fact that the figures were much stronger than expected. Indeed, the consumer price index (CPI) jumped 0.7 percent in February due to a pickup in prices for goods and services ranging from food to clothing to transportation. Even excluding volatile factors like food, energy, and mortgage costs, the core measure of CPI rose 0.5 percent. As a result of these moves, the annualized rate of headline CPI growth hit 1.4 percent, up from 1.1 percent, while core CPI went unchanged at 1.9 percent.

Unlike the CPI numbers, the upcoming release of Canadian retail sales could be highly market-moving for the Canadian dollar as a Bloomberg News poll of economists is calling for a small 1.0 percent increase during the month of January, but there is evidence that suggests the figure could actually fall negative. Indeed, with unemployment rates rising, business activity slowing, and the March 18 release of Canadian wholesale sales down much more than expected, continued declines in retail sales seem increasingly possible. If the indicator disappoints, the Canadian dollar could pull back sharply, especially since the Bank of Canada suggested on March 3 that they may be open to making monetary policy more accommodative even after slashing interest rates to a record low of 0.50 percent. However, if retail sales actually rise, the Canadian dollar could continue to rally.

Terri Belkas is a Currency Strategist at FXCM.