A Thursday morning rally in the dollar is not so much inspired by the every-other-day-excuse of rising risk aversion, but follows a minor improvement in the labor market according to weekly claims data. The FOMC minutes released a day earlier made it clear that a retirement party is in the works for quantitative easing, although no one seems prepared to call the caterer at this stage. Before the Fed can pop the champagne corks and streamline its balance sheet the minutes yesterday confirmed that official interest rates will likely rise, but that will come only after the Fed stops reinvesting maturing securities.
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U.S. Dollar – The dollar’s reversal from an earlier loss on Thursday is somewhat surprising. The Federal Reserve minutes of its April 26-27 meeting for the first time discussed an exit strategy and attempted to get its ducks in a logical row. Yet the timing of an exit remains elusive as suggested by the division on the FOMC. But its duel-mandate of low-inflation and full-employment is also facing the challenge of a sluggish labor market and certainly so outside of the manufacturing sector. A sharp fall to 409,000 for initial claims through last weekend seems to be the engineer behind the wheel for the dollar’s latest rip this morning. Ahead of the data its index fell to 75.22 but the fact that first time claims is once again tapping on the door at the critical 400,000 marker is likely to prompt dealers to perceive a faster rather than slower exit from quantitative easing. The bond market continued to weaken in response to the firmer reading adding fuel to the fire with long-term yields adding to the desire to hold dollars.
Japanese yen – The dollar rose most against other traditional risk safe havens such as the Swiss franc and the Japanese yen. A downwards revision to fourth quarter GDP and confirmation that the earthquake inflicted far greater damage on the domestic economy saw the yen swoon on Thursday. With three weeks of the first quarter hindered by a standstill in consumption and a halt across industrial and manufacturing output riddled by supply-chain disruptions the economy contracted by 0.9% and shrinking by 3.7% year-on-year. That reading is pretty much twice the size economists were afraid of. Dealers slashed their forecasts for the yen, although Goldman Sachs argued that the dollar’s prospects were more vulnerable to homegrown prospects. The investment banker reined in its predictions for the dollar, but maintained a view that the yen would still weaken. The dollar today rallied massively to reach ¥82.17 according to Interactive Brokers data as the yen weakened against the majors.
British pound – The British pound spent most of the morning in positive form in response to a firm retail sales report for April. Sales were ahead of expectation rising 1.2% on the month to stand 2.8% ahead on a year-ago basis. March data firmed in the accompanying revision to today’s report. The pound rose to a little above $1.6200 aided by a weaker dollar. In the bigger picture the pound’s gains remain suspiciously devoted to aspirations of what I predict will be an unlikely move on monetary policy from the Bank of England. The unit turned back to negative territory following U.S. data and remained on an even keel per euro at 88.06 pence.
Euro – The single currency also attempted a rally on data-free Thursday but was pushed back once stops were satisfied above $1.4300. Any solution to peripheral woes remains elusive following the ECB’s rebuttal of political theories suggesting debt restructuring for Greece. And as much as the market clings to this as a potential work around, investors might regret being long of the currency if and when that maelstrom touches down. Such fears lingering on the horizon seem to be cramping any meaningful euro currency recovery and explain dealers’ preparedness to continue testing the downside as U.S. data competes for the economic headlines. The euro traded recently and ahead of existing U.S. home sales data at $1.4262 after rebounding from $1.4206.
Aussie dollar – The buoyant tone to commodities and equities early had the growth-sensitive crowd rallying with vigor against the greenback. However, it was again the initial claims data and rising treasury yields that played right into the American unit’s hands forcing the Aussie in particular to retreat back towards the start line. The Aussie’s best point of the day was late in the Asian session when it touched $1.0681 U.S. cents. It eased in European trading as dealers digested a slowdown in weekly wage data. Aussie weekly wage growth numbers cooled to a 3.8% year-on-year pace through February and will be welcomed by the RBA as a sign that broadly rising inflation isn’t taking a hold in the tightening labor market. The unit eased as the dollar fought back and the pair last traded at $1.0647.
Canadian dollar – The Canadian unit is trying hard to hold on to an earlier commodity-rebound induced gain against the dollar. Friday brings inflation and retail sales reports giving Bank Governor Carney additional ammunition at a forthcoming address. The unit earlier fetched $1.0347 U.S. cents before struggling falling to $1.0321.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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