Euro Tumbles As A Break In Employment Overwhelms Strong Retail Figures

US Dollar Rally Extended As Growth, Rate Forecasts Lifted
Conditions seem to be improving for the ailing US dollar. A strong showing from the economic docket, falling crude prices and a boost to interest rate expectations all helped to drive the greenback to its third consecutive rally today. Looking at the fundamental source of this dollar strength, the first quarter GDP revision took the lead. Though the change to the annualized figure from an initially reported 0.6 percent clip to 0.9 percent merely matched economists’ expectations, the rebound helped sideline fears of an impending recession. The breakdown of the growth report revealed the narrowing of the trade balance to a five-year low - thanks to record exports and curbed imports - marked the largest positive change to the headline reading. However, consumer spending was unchanged at 1.0 percent growth from the year before – the slowest pace of expansion since the 2001 recession. This statistic should act as a warning for traders not to be too optimistic on the outlook for the second half. Indeed, the past two quarters expansion was still the worst period of growth in five years and consumer spending is expected to drop much further as the housing recession deepens and employment trends recede. Looking beyond the economic calendar, the pickup in the growth number added to the hawkish outlook for the June FOMC rate decision that has already been padded by the heavy inflation concerns in the minute’s forecasts and recent Fed speak. Fed Fund futures suggest the market is pricing in a 98 percent chance that rates will be held in June and a 34 percent probability of a quarter point hike in September.

Euro Tumbles As A Break In Employment Overwhelms Strong Retail Figures
The euro dropped nearly 120 points against the US dollar and 50 points against its British counterpart Thursday as a mixed batch of data found bears a little more receptive to fundamentals. From well-stocked European economic calendars, the title of top event risk went to the frequently market-moving German employment numbers. Recently, this indicator has lost some of its clout among the FX crowd as the series has steadily improved for over two years. With the May figures, the unemployment rate was unchanged at a 15-year low 7.9 percent. However, the unemployment change was a considerable surprise when the indicator printed the first increase in jobless claims since January of 2006. The news clearly caught the market off guard; but such a reading was long overdue considering the cooling in exports and sharp rise in input costs that has weighed on business sentiment was bound to catch up with hiring trends. And, while the employment numbers are restraining growth forecasts for vigil rate watchers, the session’s other releases may still have an impact on the speculation down the line. The Bloomberg German retail PMI marked its biggest jump in 18 months - a strong sign for domestic spending. If tomorrow’s German retail sales figure confirms today’s PMI, the balance may be restored to euro and EURUSD can recover some of its losses.

British Pound Weighed Down By Sharp Drop In UK Home Prices
While the British pound recovered somewhat from a steep decline during the European trading session, the release of weaker-than-expected house price data undoubtedly took a toll on sentiment on the currency. UK home prices, as measured by Nationwide Building Society, tumbled 2.5 percent during the month of May – the sharpest decline since record keeping began in 1991 – while prices fell 4.4 percent from a year earlier. Indeed, tighter lending standards have cooled demand for properties and mortgages, leaving the UK housing sector a major soft spot for the national economy. However, given the fact that recent consumer price growth has proven to be stronger than expected and is only forecasted to accelerate faster in coming months, the Bank of England has very little scope to cut rates from the current level of 5.00 percent. If the reality of this situation takes a hold of the markets, GBP/USD could regain footing to climb toward 2.00.

Commodity Dollars: Why Canadian Q1 GDP Could Be Stronger Than Expected on Friday
A reversal in commodity prices, including oil and gold, weighed on the Australian and New Zealand dollars on Thursday. However, the Canadian dollar was impervious to the plunge in crude – with which the currency normally has a strong correlation – as Canada's current account balance nearly doubled forecasts as exports of goods surged through the first quarter. The current account balance jumped to a C$5.6 billion surplus that was not only a strong rebound from the previous reading but also the largest positive gap for the series since the third quarter of 2006. Even more encouraging for the health of trade was the fact that the fourth quarter balance was revised from its previously stated deficit to a positive C$0.8 billion surplus. The data bodes very well for Friday’s Canadian Q1 GDP release. According to a Bloomberg News poll, economists expect growth to slow to a tepid 0.4 percent pace from 0.8 percent in Q4 2007. However, given the significant jump in exports, the data could be surprisingly strong and lead the Canadian dollar to rally, but regardless, traders should expect a pick up in volatility on this release.

Japanese Yen Tumbles Versus the US Dollar, British Pound
While the Japanese yen traded wildly across most of the majors but made little headway, the currency tumbled against the US dollar and British pound. Indeed, market-wide we’ve seen that traders are becoming a bit more risk seeking, as indicated by the sell-off in the yen and government bonds, and mild gains in equities. Upcoming event risk for the Japanese yen includes CPI and industrial production, but as usual, Japanese fundamentals are not likely to play a big role in price action for the currency. Nevertheless, it’ll be worth watching to see if inflation pressures pick up in line with expectations, and if industrial output continues to falter amidst weaker foreign export demand.

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