•  USD falls with negative durable goods data

•  Euro trades lower on a combination of German data and possible ECB rate cuts

•  Sterling edged higher as BoE announces credit stimulus

USD – The dollar fell against the euro and the yen as orders for manufactured durable goods recorded their largest drop in 7 months in March.  The data reported included a 5.7% drop following a 4.2% increase in February, showing considerable signs of an economic slowdown.  U.S. stock index futures fell after the report, while prices for longer-dated U.S. government bonds rose.  Surveys revealed that expectations for this Friday’s GDP report is to show a 3% annual rate growth in Q1, which would be a rebound of the 0.4% gain in Q4 of 2012.  In turn, with the slow start this quarter, analysts are estimating an expansion of approximately 1.5% at the end of Q2, largely impacted by the sequester, causing businesses to be more cautious about capital project spending. 

EUR – The euro has drifted lower from poor German business sentiment data combined with the prospect of a near term rate cut from the ECB. The European Central Bank is closer to lowering interest rates than at any time since it last cut them in July 2012 and is likely to shave a quarter-point off at its policy meeting next week.  Momentum is building for action to help the euro zone economy which has slipped back into a recession, a move that some policymakers wanted to take earlier this year. After the last monetary policy meeting on April 4, ECB President Mario Draghi signaled that a cut could come soon when he said that the bank stood "ready to act" to boost the recession-hit euro zone economy. The ECB's Governing Council meets in Bratislava on May 2, one of two annual policy meetings outside Frankfurt. The 23-man body rarely moves rates when it meets off-base, but the bleak economic picture strengthens the case for action. Policymakers believe a rate cut would have limited impact on the economy but would at least show they are supporting it. A decision to cut might not be unanimously supported. With interest rates in the United States and Japan at or near zero, an ECB rate cut would diminish the euro's yield advantage. The ECB has refrained from pumping massive amounts of money into the euro zone through asset purchases, unlike the Federal Reserve or the Bank of Japan's actions on their respective economies.

GBP – The pound edged slightly higher against the dollar and the euro after Britain announced measures to pump more credit into small and medium-sized firms in an effort to stimulate its flagging economy. The Bank of England and the Treasury revised its Funding for Lending Scheme (FLS) to help smaller firms offset a credit squeeze. Analysts said this was mildly positive for sterling and it reduced the chances of the central bank increasing the size of its asset purchase program. However, the GBP is unlikely to see much support before the GDP data is released on Thursday which could show Britain slipping into its third recession in less than five years.

JPY – The yen was the key benefactor of flows from USD weakness following the release of weaker than expected U.S. durable goods orders. This strength is likely to be short lived, as analysts believe that the yen will remain under pressure from investor flows seeking higher yields, though not at the same pace we’ve seen in the past few weeks. The BOJ meets Thursday and Friday though no major policy changes are anticipated; markets await a breach beyond the 100 level – opening the door for 105 by year end. 

Commodity Currencies – The Australian dollar fell to near 6-week lows vs. the USD with weak inflation data sparking expectations of further interest rate cuts.  The New Zealand dollar rose against the USD following upbeat comments from the RBNZ of a stronger economy and plans to hold its benchmark interest rate at a record low 2.5%, for the 17th straight review.  The Canadian dollar weakened slightly against the USD with China’s appetite for oil slowing which has been a key driver of demand for the Canadian dollar.

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