US Dollar Down With Treasury Yields - US Advance Retail Sales Results Skew Reality

The US dollar was the weakest of the majors as increased risk appetite drove up demand for FX carry trades and US equities. This was interesting in that we’ve seen the correlation of the US dollar with risk trends start to die down, but by the end of the day, the greenback was a clear loser. Adding to dollar weakness, Treasuries surged, sending yields spiraling lower as an $11 billion sale of 30-year bonds drew the highest yield in almost two years, helping to alleviate concerns that foreign investor demand for the instruments would decline in light of the massive US budget deficit.

In economic news, the US Commerce Department said that advance retail sales rose by 0.5 percent in May, the first increase in three months. The gain was due primarily to a rise in spending on motor vehicles (+0.5 percent), building materials (+1.3 percent), and at gasoline stations (+3.6 percent). That said, this index is not adjusted for inflation, so the steady rise in average gas prices from roughly $2.00/gallon to nearly $2.50/gallon, according to gasbuddy.com, skews the results of the report. Meanwhile, the US Labor Department said that initial jobless claims fell by 24,000 during the week ending June 6, bringing the total down to a 19-week low of 601,000. On the other hand, continuing claims rose by 59,000 to yet another record high of 6,816,000 during the week ending May 30, signaling the same theme as last week's non-farm payrolls report: the rate of job losses may be slowing, but the unemployment rate is still steadily climbing.

Looking ahead to Friday, the preliminary reading of the University of Michigan’s consumer confidence index for the month of June is forecasted to rise for the fourth straight month to match the March 2008 high of 69.5. As it stands, recent improvements in the index have been due to increased optimism on the economic outlook, as sentiment on current conditions actually slipped between May and April, suggesting that consumers are seeing any economic changes in their daily life, but are convinced that they will see it eventually. Indeed, the pace of job losses has started to slow, but if consumers don’t start to see more encouraging signs of growth in the near-term, confidence in the outlook could start to fall.

Euro Gains Versus US Dollar, But Falls to Key Support Against the British Pound

The euro and British pound both rallied against the ultra-weak US dollar on Thursday, but there really wasn’t anything in the way of economic news to warrant the buying of the European currencies. If anything, investor sentiment was responsible for many of the moves in the FX markets, and with the British pound being traded as a “risky” asset, the currency proved to be stronger than the euro. In fact, the decline in EUR/GBP took the pair down to key support at 0.8500, which is both a psychologically important level as well as the 61.8 percent fib of the late 2008 rally. However, a break lower leaves the door open to more significant declines toward the December 2008 low of 0.8233 and former congestion near 0.8145/50.

Japanese Yen Falls Amidst Final Q1 GDP Results, Increased Demand for Carry Trades

The Japanese yen was the second weakest of the majors on Thursday as increased risk appetite drove up demand for FX carry trades and equities, with the DJIA ending the day up 32 points at 8770.92. That said, the moves ultimately kept the DJIA within its week-long trading range since it was unable to close above the June 5 high of 8839, suggesting that the index’s rally today didn’t mark a true breakout. Japanese economic data had no impact on the currency overnight despite the fact Q1 GDP was revised higher than expected to an annualized -14.2 percent from -15.2 percent. According to the Cabinet Office’s final reading, capital spending and inventories fell at a slower pace than previously anticipated, but even the revisions left GDP down by the most since recordkeeping began in 1955 as export demand collapsed amidst the global economic slowdown.

Australian Dollar Makes Headway as Australian Employment Change Falls Much Less Than Expected

The Australian dollar received a small boost during the Asian trading session from the release of employment data, and increased risk appetite helped propel the currency higher later on, taking AUD/USD above Wednesday’s highs toward 0.8250. Looking at the economic data on hand, the Australian net employment change fell by 1,700 during May, which was much less than the expected drop of 30,000. Nevertheless, the unemployment rate still increased to 5.7 percent from an upwardly revised 5.5 percent, indicating that the Australian labor markets are indeed deteriorating. Furthermore, a breakdown of the report shows that the overall reading was saved by a 24,500 person increase in part-time employment, as the number of full-time jobs fell by 26,200.

Terri Belkas is a Currency Strategist at FXCM.