• USD gains strength as data signals economic activity expanding
• ECB cuts interest rates to an all-time low
• CAD strengthens following a surprising trade surplus report
USD –The dollar strengthened against the majors following the ECB’s decision to cut interest rates to record lows and positive US economic data. US jobless claims unexpectedly fell last week by 18,000 to 324,000, the lowest level in over 5 years. Despite signs of job retention by companies, Federal Reserve officials are fighting the risk of a fourth straight summertime slowdown by announcing yesterday that the FOMC will continue its monthly bond purchases at $85 billion and are prepared to increase or reduce the pace of purchases. This signals that its $3.32 trillion balance sheet is a flexible tool for monetary policy that can be adjusted up or down, like interest rates. Tomorrow, the labor department will release the unemployment/nonfarm payrolls report with expectations of a 7.6% unemployment rate and an increase of 145,000 jobs in the month of April.
EUR – The euro fell sharply against the US dollar following the European Central Bank’s decision to cut interest rates 25 basis points to a record low of 0.50%, its first cut in 10 months. The decision stemmed from low inflation data at 1.2% in April, short of the ECB’s target of 2%. ECB President Draghi commented that they are technically prepared for a cut in the deposit rate to negative levels which he opposed in the past due to potential negative consequences. In addition, he reiterated that the central bank’s monetary policy will remain accommodative for as long as needed to stimulate an economic recovery.
GBP –The pound sterling fell against the USD for the first time in 7 days after rising 2.7% in the past month. The drop was caused by lower-than-expected manufacturing data in April. Economists are downbeat on the UK economy, though the pound has rallied over the past month, a rebound phase after its 6.5% sharp decline in the first quarter. Also market participants are bearish that if UK GDP growth fails to gain traction in the coming months, the BoE may extend its monetary policy stance further by increasing its asset purchases this year, which could be announced next week after the release of its quarterly economic forecast.
JPY – The JPY weakened against the USD leading into its holiday. The monetary base last month rose 23.1% year-over-year, highlighting the impact of the BoJ’s policy. BoJ Governor Haruhiko Kuroda reminded market participants that JPY depreciation should be viewed as an adjustment from past gains. Expect the USD/JPY to trade over the 50-day MA of 96.00 and meet some resistance at the 98.40 level.
Commodity Currencies –The Canadian dollar strengthened against the USD after a trade surplus report surprised the market with data reporting exports grew faster than imports by $24 million in March after a $1.25 billion deficit in February. The report also showed that exports increased by 5.1% while imports advanced by 1.7%, the first Canadian trade surplus since March 2012. The Australian and New Zealand dollar remain under pressure against the USD as renewed concerns about the global economy sent investors scurrying for government bonds. Recent weak manufacturing data coming out of China grew concerns that the world’s second biggest economy is slowing as external demand is deteriorating.
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