US Dollar, Japanese Yen Down as S&P 500 Gains 1.5% - US GDP Revisions Could Shake Up Risk Trends on Friday

The US dollar and Japanese yen both fell back on Thursday, though the yen was easily the biggest loser of the day, as carry trade demand remained high. The US saw a variety of economic releases, as orders for durable goods jumped 1.9 percent during the month of April thanks to an increase in demand for automobiles and rising defense spending. At the same time, the March reading was revised steeply lower to -2.1 percent from -0.8 percent, signaling that the resurgence in orders may not be quite as strong as it appears. Furthermore, orders for capital goods excluding aircraft, a gauge of business investment, fell for the second straight month, suggesting that the business outlook for growth in the next six months remains fairly bleak.

Likewise, the US housing outlook has deteriorated as Freddie Mac said that the 30-year fixed rate on mortgages rose for the first time since February to 4.91 percent in May from 4.82 percent. Adding to this, the Mortgage Bankers Association (MBA) reported that mortgage delinquencies and foreclosures rose to record highs during Q1 in the first quarter as the US government's efforts to revive housing prove to be somewhat ineffective. On the other hand, the Commerce Department's new home sales report showed that sales rose in April by 0.3 percent to an annual rate of 352,000, which comes on the tails of yesterday's better-than-expected NAR existing home sales release. A breakdown shows that supply levels fell to 10.1 months from 10.6 months, while median prices rose 3.7 percent to a four-month high of $209,700. That said, prices are still down 14.9 percent from a year ago.

Finally, the Labor Department said that initial jobless claims fell for the second straight week by 13,000 to 623,000 in the week ending May 23. However, continuing jobless claims soared by 110,000 to yet another record high of 6,788,000 in the week ending May 16. All told, the shifts reflect a similar labor market picture to what we've seen in recent months: while job losses may be slowing month to month, the unemployment rate is still climbing as companies are simply not looking for additional workers in a recession-plagued US economy.

Looking ahead to Friday, the second round of US Q1 GDP estimates are due to hit the wires, and the results could be market-moving. The preliminary reading is forecasted to be revised up to -5.5 percent from -6.1 percent, which also marks an improvement when compared to the Q4 2008 result of -6.3 percent. There is some evidence that revisions will be to the downside, though. First, the US trade deficit widened for the first time in eight months during March by 5.5 percent to $27.6 billion. A breakdown of the report showed that exports slumped 2.4 percent to a more than two-year low of $123.62 billion while imports fell 1.0 percent to $151.196 billion. According to Bloomberg News, the Commerce Department used a much larger increase in exports when calculating Q1 GDP, suggesting that initial estimates of a 6.1 percent annual contraction may have been optimistic. Also, personal consumption is forecasted to be adjusted to 2.0 percent from 2.2 percent after March advance retail sales were revised down to -1.3 percent from -1.1 percent.

Overall, risk appetite has been on edge, and when looking to daily charts of the major US equity indices, it looks like there is some bearish potential as both the DJIA and SPX have established a set of lower highs, while clear support looms below at 8,250 and 880, respectively. Indeed, a break below those noted support levels would signal further losses, and may also suggest that safe-havens like the US dollar and Japanese yen are in for gains. Traders should also consider, though, the correlations have been rising and falling from day-to-day. For example, we saw the US dollar lose demand as a “safe haven” asset last week, and today, the Japanese yen was the biggest loser throughout the European and US trading session even though US equities didn’t rally until after 13:00 ET.

Euro, Swiss Franc Hold Below Key Resistance vs. US Dollar, EUR/USD Faces Euro-zone CPI on Friday

The euro and Swiss franc were mixed across the majors, while EUR/CHF went completely unchanged, as the European currencies gained versus the US dollar, British pound, and Japanese yen, but lost against the commodity dollars. However, the euro and Swissie are showing signs of a possible turn from immediate resistance in the near term, as EUR/USD has been unable to push above 1.3950 and USD/CHF has failed to break below 1.0800. Furthermore, FXCM SSI – a contrarian indicator – has begun to show that the extremes we’ve seen in the currency pairs have started to break down, suggesting reversals may be on the way. Looking to the data on hand, the Swiss Federal Customs Office said that Swiss exports rose in April, helping to push the trade surplus to 2.6 billion francs from 151 million francs in March. Indeed, exports jumped for the first time in three months at a rate of 8.3 percent in April, the biggest gain in three years while imports fell 0.3 percent. Ultimately, the data suggests that with demand from the Euro-zone starting to pick up a bit, recovery may be around the corner for Switzerland.

On Friday, Eurostat is expected to report that annual CPI growth in the Euro-zone slowed to a 0.2 percent pace in May from 0.6 percent. This would mark a record low for the index, and the big concern here is that the persistent drop in prices signals how great the downside risks are for inflation, in that it could quickly turn into deflation. The European Central Bank has acknowledged that CPI could turn negative for a few months this year, but if we start to see the index contract more from month to month, the euro is likely to respond accordingly.

British Pound Outlook Remains Bleak as CBI Survey Reflect Falling Retail Sales

The British pound was generally a laggard versus most of the majors, though GBP/JPY continued rallying, as the Confederation of British Industry (CBI) survey of retailers showed that a net 17 percent saw a drop in sales this month, compared with a net 3 percent saying sales rose in April. For what it’s worth, the UK fundamental outlook remains extremely dire, especially when you consider that S&P said last week that they were downgrading the UK outlook to “negative” from “stable.” Keeping that in perspective, the GBP/USD push above 1.60 may have been nothing more than a false break, and with daily RSI remaining overbought it seems as though the pair may experience a correction in coming days.

Terri Belkas is a Currency Strategist at FXCM.