US Dollar: Record Close for US Stocks Limit Losses in Carry Trades
Not only did US stocks not react to the 6.5 percent drop in Chinese shares, but the Dow Jones Industrial Average hit a new record high on both a closing and intraday basis. Having started the day down 60 points, today’s move is nothing short of impressive. The risk appetite of US stock traders is voracious as they completely shrug off the losses in Shanghai. Currency traders on the other hand were more cautious and less optimistic. Most of the carry trades with the exception of AUD/JPY and NZD/JPY are still down on the day despite some intraday recovery, raising the question of which market is right. This may perhaps be more of a question of long term versus short term as the move in US stocks signals a potentially strong recovery in Chinese stocks tonight. The problem is that if the Chinese market does not continue to fall and instead recovers its losses to hit another record high like it did back in February, the Chinese government will become extremely agitated. Their only response will be to do more rather than less to cool the bubble which will eventually hit carry as well as the US stock market. In the short term however Chinese traders will be delighted by this rally. Economic data however was not as supportive with both the ADP employment survey and Hudson employment index falling short of expectations. The market is looking for 135k jobs to have been added to US payrolls this month with the estimates ranging from 224k to 45k. These numbers already include any revisions by analysts in reaction to today’s 97k ADP reading. The softer leading indicators for payrolls do suggest the possibility of weak job growth, but we believe that there is still a decent chance that we could see more than 150k job growth. The last time the 4 week moving average for jobless claims were as low as they were in May was in February 2006. At that time, US corporations added 300k jobs to their payrolls, a 100k more than the previous month. We will cover payrolls more tomorrow, since we are expecting revisions to first quarter GDP, the Monster.com employment index, Chicago PMI, jobless claims and construction spending in the next 24 hours. The big market mover tomorrow should be GDP. The market is current looking for a downward revision to growth which if true, would take some steam out of the stock market and dollar rally. The minutes from the FOMC meeting released today triggered the move higher in the Dow even though there were no surprises. The bottom line is that FOMC still intends to keep rates unchanged until the end of the year and the futures curve reflects that.

Euro: Softer Consumer Spending Data Keeps Euro in Its Range
The Euro which is typically the most interesting currency to trade has become the most boring. The EUR/USD has been stuck within a 50 pips trading range for the past 24 hours and a quick look at the charts will reveal a tight trading range for the past week. With the European Central bank scheduled to meet on June 6, incoming economic data has done little to clarify whether the central bank will raise rates beyond June. Yesterday, we had a very strong current account number, but today, Eurozone retail PMI dropped back into contractionary territory. This suggests that consumer spending was very weak in April and or May. In addition to that disappointment, M3 money supply which is an inflationary indicator also fell short of expectations, signaling that inflationary pressures may be abating. It may seem that data is beginning to weaken, but there are still a lot of data that could shift the outlook either way. In the next 24 hours, we are expecting German and French unemployment along with French PPI and Eurozone consumer confidence. Meanwhile the Swiss franc is stronger against the Euro ahead of its first quarter GDP release tomorrow. The weakness of the franc should lead to stronger growth.

British Pound: Looking for Clues to Verify the Need for another Rate Hike
The British pound is weaker across the board on the back of carry liquidation. There was no UK economic data released overnight, so the move in the currency pair is far more flow than data driven. Blanchflower, who is typically seen as a dove indicated today that he voted in favor of a rate hike this month but gave little clues as to whether he will continue to support tighter monetary policy in the meetings to come. The economic calendar picks up for the UK tomorrow with Nationwide house prices, consumer credit, mortgage approvals, money supply, the GfK consumer confidence index and the CBI Distributive trades survey all due for release. Most of these are tier 2 data, but with traders looking for clues to whether the Bank of England will still raise rates this year, any big surprises in the data could be market moving.

Japanese Yen: Be Careful of More Moves by China
The Japanese Yen is stronger against all of the major currencies with the exception of the Australian and New Zealand dollars. Even though the US stock market has not responded to the move in the Shanghai index, carry traders need to be very careful in the weeks to come. If the Shanghai stock market rebounds and refuses to fall, the Chinese government will become even more anxious about cooling the stock market. As a result, they could take more aggressive measures which would only put further pressure on carry trades. To read more, please see our Special Report: Chinese Stock Markets Collapse, Dow Moves Limited – Chances for a Yuan Free Float Increases.

Commodity Currencies: Australian and New Zealand Dollars Soar on Acquisition Rumors
The Australian and New Zealand dollars are extremely strong today despite mixed economic data. Australian retail sales were much lower than expected, rising by a mere 0.1 percent last month. On the other hand New Zealand building permits and money supply were stronger than expected, which makes the rally in the AUD/NZD today somewhat illogical. The only explanation for the strong moves in the AUD and NZD are merger and acquisition rumors. Tonight, we have the Australian trade balance due for release as well as the NBNZ business confidence index, which means that there could be more action in the pairs. Canada has GDP due for release as well. The Canadian dollar is unchanged on the day amidst mixed data. The current account was weaker than expected, but raw material prices were very strong.

Kathy Lien is the Chief Currency Strategist at FXCM.