•  US GDP report grows concern of a struggling economy 

•  Euro faces challenges against the yen as investors look to cheaper imports

•  JPY soared following unchanged BoJ policy

USD – The US dollar slid vs. the Japanese yen and rose slightly vs. the euro following weaker than expected data on US economic growth, increasing concerns that the already soft economy is struggling to fight sequestration.  The Commerce Department reported GDP growth of 2.5%, which was much higher than the 0.4% in Q4 of 2012, however fell short of expectations of a 3% growth rate.  Consumer spending, which is two-thirds of economic activity increased 3.2%, the fastest since Q4 of 2010.  However household savings dropped 5.3%, the largest since Q3 of 2009, signaling concerns for future spending growth.  The less-than-expected increase may weigh on US stocks and allows ammunition for the FEDS to maintain its monetary stimulus.  Expectations to keep purchasing bonds at $85B per month remain at the FED meet next week.

EUR –Euro gained slightly against the USD and soared against the Japanese yen, creating new challenges for Germany’s giant exporters from Japanese rivals.  A 30% drop in the yen vs. the euro has occurred since mid-2012, stemming from radical measures to stimulate the Japanese economy by the BoJ.  This marks a potential risk for Germany, which is the world’s second largest exporter after China, since it makes Japanese exports the cheaper choice.  International investors are remaining focused on Germany’s share index-the DAX as it was Europe’s top performing index last year and lists firms generating 75% of their sales from outside the country.  The euro remains under pressure on prospects the ECB will cut rates next week to support a fragile economy.

GBP – Sterling climbed to a 2-month peak against a weaker dollar and is poised for its largest weekly gains in a year, after U.S. growth data missed forecasts, though gains may be short-lived given a still more promising economic outlook in the United States than in Britain.   The pound has also been supported by better-than-expected GDP data, sparking relief that Britain had avoided another recession.  Economists believe that the British economy still looks shaky and the BoE could opt for further monetary easing if the nascent recovery lost momentum.  Expectations are building that incoming governor Mark Carney, who takes over in July, could resort to more aggressive monetary easing in the face of tight fiscal policies.

JPY – The JPY strengthened against the USD after the BoJ left policy unchanged and after data showed US economic growth expanded in Q1.  The BoJ held off from announcing new monetary initiatives today, while policymakers were divided over whether the central bank can meet its target for 2% inflation in 2 years.  Market participants believe the USD/JPY rate could be between the 95-100 yen level in the next few weeks.  Japanese manufacturing PMI data, as well as the unemployment rate are due Monday.  Expect the JPY to remain in its recent ranges until next week’s economic data.

Commodity Currencies – The Canadian dollar hit its strongest level in more than a week against the USD after data showed U.S. economic growth sped up in the first quarter but not by as much as had been expected.  Next week, markets will keep an eye on Canadian GDP data on Thursday and jobs report data on Friday.  The New Zealand dollar remains well supported due to the fact that the Reserve Bank of New Zealand  is differentiating itself from its counterparts in the US, Australia and Japan, with the prospect of raising interest rates by year end.  The prospect of higher yield, coupled with trade surplus data that showed China replacing Australia as the country's top export market for the first time, is keeping the kiwi near record highs.  The antipodeans had climbed to 5-year peaks this month, showing an increase of at least 13% against the yen, on speculation the money created by the BOJ will eventually find a home in offshore higher yielding assets.


For more market reports go to Union Bank of California