US Dollar, Japanese Yen Down Post GDP, FOMC - Retracements on Thursday?

The US dollar and Japanese yen were the weakest of the majors as a surge in risk appetite provided a big boost to “risky” assets, including the higher-yielding commodity dollars and stocks. The sharpest moves occurred over the course of the morning, but cooled down over the afternoon as the Federal Open Market Committee’s (FOMC) latest policy statement didn’t veer far from what they said on March 18, as the central bank opted to leave the fed funds target range unchanged at 0.0 percent - 0.25 percent and said that “conditions are likely to warrant exceptionally low levels...for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.

That said, there were tinges of optimism within the policy statement as the FOMC qualified their initial, repeated remark that data indicates that the economic contraction has continued by adding that “the pace of contraction appears to be somewhat slower.” This is generally in line with news we’ve been hearing lately, including the surprising surge in US consumer confidence. However, the results of Q1 GDP reflect a somewhat different picture.

Indeed, the US economy contracted more than expected at the start of the year, as GDP fell 6.1 percent against forecasts for a 4.7 percent drop, after Q4 GDP plunged 6.3 percent. The breakdown of the report shows that a massive 51.8 percent fall in gross private investment was responsible for a bulk of the drop, with both nonresidential and residential showing declines of about 40 percent. Meanwhile, personal consumption actually increased 2.2 percent, led by durable goods and services, and net exports were positive. That said, trade flows were down very sharply, as exports tumbled 30 percent and imports slumped 34.1 percent. Since this was the advanced reading, there will be two opportunities for this result to be revised, but ultimately, the news suggests that the recession may not be getting worse, but it isn’t substantially improving either.

Looking ahead to Thursday, US personal income is projected to have dropped by 0.2 percent in March, marking the second straight contraction, while personal spending is anticipated to dip 0.1 percent. If these results prove to be surprisingly weak, they will suggest that Q1 GDP will see downward revisions, and the news could also hurt risk appetite. In fact, given the extent of the US dollar and Japanese yen pullbacks on Wednesday, there is potential for broad retracements on Thursday, especially if rumors that Chrysler will file for bankruptcy come to fruition.

New Zealand Dollar Plummets as RBNZ Cuts Rates to 2.50%, Signals Low Rates Through Late 2010

The New Zealand dollar plunged across the majors at 21:00 ET on Wednesday after the Reserve Bank of New Zealand cut their official cash rate target by 50 basis points to 2.50 percent, as the "world economy deteriorated more than expected" during Q1. The reduction was in line with forecasts published by Bloomberg News, but differed from what Credit Suisse overnight index swaps were pricing in, as they only fully reflected a 25 basis point cut. Looking to the RBNZ Governor Alan Bollard’s policy statement, it is clear that the central bank has cut back their inflation expectations due to weaker global growth and tight financial conditions. Furthermore, the RBNZ anticipated that the “adverse economic forces generated by the crisis to remain dominant throughout 2009,” with the “timing and extent of recovery” remaining “highly uncertain.” While all of this was negative for the New Zealand dollar, NZD/USD was able to break below 0.5700 on comments that the RBNZ expected to leave the OCR at or below current levels through the end of 2010. This leaves additional downside risks for the New Zealand dollar, especially if risk aversion remains a lingering issue.

Euro, British Pound Gain vs. Low-Yielders, Fall vs. Commodity Dollars

The euro and British pound ended Wednesday on a mixed note, losing against the ultra-strong commodity dollars but gaining versus the low-yielding Japanese yen, US dollar, and Swiss franc. Looking to EUR/USD and GBP/USD, both pairs back off from key trendlines, as EUR/USD resistance came into play at 1.3340 while GBP/USD resistance loomed at 1.4815. Meanwhile, there wasn’t much in the way of economic data for either region, though Euro-zone retail PMI and economic confidence reflected notable improvements.

On Thursday, UK Nationwide House Prices are forecasted to have fallen by 1.2 percent during April, which would bring the annual rate down to -15.8 percent from -15.7 percent. This data doesn’t tend to be hugely market-moving for the British pound, the news could counter arguments that the UK housing collapse is not over yet. Economic news from the Euro-zone may be similarly disappointing, as the German unemployment change is forecasted to have risen for the sixth straight month in April by 65,000, pushing the unemployment rate to 8.2 percent from 8.1 percent. Likewise, the Euro-zone unemployment rate is expected to have risen to more than five-year high of 8.7 percent in March from 8.5 percent. Adding to the mix, Eurostat’s inflation estimate for the region may have edged up to an annual rate of 0.7 percent in April from 0.6 percent, but even this would leave CPI well below the European Central Bank’s 2.0 percent target.

Terri Belkas is a Currency Strategist at FXCM.