US Dollar Continues to Make Headway, Japanese Yen Edges Higher

The US dollar and Japanese yen ended Monday mostly higher against the majors, as there was little in the way of fundamental news. For the greenback, the moves marked a continuation of Friday’s post-NFP rally. Meanwhile, the yen’s gains, especially those made against the high-yielding commodity dollars, were linked with price action in the equity markets as the DJIA spent most of the day in negative territory, only to rally at 15:00 ET and end the practically unchanged from Friday at 8764.49.

Looking ahead to Tuesday, US wholesale inventories are forecasted to have contracted for the eighth straight month in April at a rate of -1.2 percent, as businesses cut back on excess supply levels in an attempt to account for weak demand. It will also be important to look at the wholesale sales component, which has been rather volatile in recent months as the index fell 2.4 percent in March but rose by 0.2 percent in February. A continuation of a downtrend in wholesale sales would not bode well for other indicators like durable goods orders and retail sales. That said, this is a very lagging indicator, so the results shouldn’t be incredibly market-moving for the US dollar.

Euro, Swiss Franc Down as S&P Issues Second Downgrade on Ireland’s Credit Rating

The euro came under pressure across the majors following an announcement by Standard & Poor’s, as the ratings agency lowered Ireland’s long-term sovereign credit rating again to AA from AA+, and revised their outlook to "negative," noting that "[f]iscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009.” However, the currency showed little response to news from Germany when the Economy Ministry said that factory orders stagnated during the month of April after rising 3.7 percent in March, while the annual rate of growth plunged to -37.1 percent, nearing the record low of -38.0 percent reached in February. Overall, the results highlight the impact of lackluster domestic and foreign demand on German producers.

The Swiss franc was even weaker than the euro, as the currency fell against every major but the New Zealand dollar. The State Secretariat for Economic Affairs said that the Swiss unemployment rate (seasonally adjusted) rose to a more than three year high of 3.5 percent during May, up from 3.4 percent. According to Q1 GDP figures, household consumption actually increased by 0.1 percent during the quarter, after falling 0.1 percent in Q4, but a continued deterioration of the labor market suggests that spending could slump again in Q2.

On Tuesday, the German trade surplus is projected to narrow to 9.3 billion euros for the month of April from 11.3 billion euros, due primarily to a drop in exports. Indeed, like the factory output results we saw today, the news is likely to highlight the impact of the Euro-zone's broad recession on the trade-dependent nation. A reading that is worse than expectations could weigh on the euro, especially if the export component drops very sharply. On the other hand, if the surplus holds fairly steady or increases, the currency could rally in response.

British Pound Gains as the BOE Considers Expanding Their Asset Purchase Facility

The British pound staged a solid rebound on Monday and ended as the strongest of the majors after the Bank of England published a paper in which they discussed expanding their Asset Purchase Facility (APF) to include purchases of secured commercial paper. The goal would be to allow greater access to short-term working capital for firms that make a “material contribution” to the UK economy. As it stands, the BOE has already announced a quantitative easing program in which it will buy up to125 billion pounds worth of corporate and government securities. This program is already under way and should be completed within two months, but it isn’t entirely clear how much more the BOE plans on spending for an expansion of the APF, or if the expansion will actually happen. The central bank is currently inviting comments on the paper up until June 19, indicating that decisions and details will not be released until the end of the month, at the very earliest. Indeed, this makes the release of the BOE’s June meeting minutes on June 17, as well as the BOE’s next policy announcement on July 9 all the more important, as the news may provide further insight into the central bank’s plans.

Canadian Dollar Rises as Canadian Housing Starts Jump from 13-Year Low

The Canadian dollar held its own on Monday, and despite a strong rally during the Euroepan trading session, USD/CAD ultimately closed down very slightly just above support at 1.1150. Canadian economic data was surprisingly strong, as Canada Mortgage and Housing Corp. reported that housing starts jumped by 9.2 percent in May to an annualized pace of 128,400 units from a 13-year low of 117,600. The result adds to the mixture of indicators that offer a clouded view of growth in the nation as the economy contracted by 5.39 percent in Q1, the sharpest drop in 18 years. Meanwhile, the Canadian employment and the Ivey Purchasing Managers’ Index showed strong gains in April, only to fall back in May to reflect deterioration in both the labor markets and business activity. Ultimately, the Canadian economy may still be fairly weak, but it’s looking like the recession bottomed during Q1, offering fundamental support for the Canadian dollar.

Terri Belkas is a Currency Strategist at FXCM.