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- Euro Gains Despite Forecasts for Euro-zone to Fall 4.2% in 2009, Ahead of Euro-zone Composite PMI Report
- British Pound Plummets as UK Budget Statement, Unemployment Rate Highlights an Economy in Distress
- Australian Dollar, New Zealand Dollar Remain Laggards as Carry Trades Fall
- Canadian Dollar Mixed Ahead of Canadian Retail Sales on Thursday

Japanese Yen Continues to Make Headway, US Dollar Index Tests Former Resistance
The Japanese yen was easily the biggest gainer on Wednesday, as crucial carry-trade components like the yen, Australian dollar, and New Zealand dollar have been some of the only currencies to see directional moves while everything else consolidates Monday's moves. This is perhaps best highlighted by the US dollar, which appreciated against everything but the Swiss franc, euro, and Japanese yen. That said, the DXY index spent much of the day consolidating above Monday's high of 86.09 and remains very much within an uptrend, leaving upside potential open. Indeed, as we mentioned yesterday, there is substantial uncertainty about the health of the financial markets as the US government performs stress-tests on the 19 biggest US financial institutions, and until the results are announced on May 4, there is still potential for risk aversion to weigh heavily.

Euro Gains Despite Forecasts for Euro-zone to Fall 4.2% in 2009, Ahead of Euro-zone Composite PMI Report
The euro was actually one of the stronger major currencies today, though the Japanese yen ultimately proved to be the winner. There was no economic data on hand, other than the International Monetary Fund's (IMF) revised global growth outlooks, which forecasted that the Euro-zone economy would shrink by 4.2 percent this year. There was also a notable comment from German Chancellor Angela Merkel, who told reporters that the government has no intention of expanding its 82 billion euro stimulus plan, which is actually under two programs as she said, We shouldn't talk about a third stimulus package. Instead we'll let current measures take effect.

Looking ahead to Thursday, business activity in the Euro-zone's manufacturing and services sectors are expected to have deteriorated further during April, as the composite Purchasing Managers' Index (PMI) is projected to hold well below 50 at 38.9, up from 38.3 in March. This would mark the eleventh straight month that the index signaled a further contraction in activity, and would also suggest that the European recession is far from over. In fact, according to forecasts published by the International Monetary Fund (IMF), the Euro-zone economy could shrink by as much as 4.2 percent in 2009. Readings in line with expectations aren't likely to shake up price action too much, though disappointing results would add to evidence that the European Central Bank may cut rates to 1.00 percent in May.

Related Article: Euro/US Dollar Loses Correlation to S&P 500 - Time for Turn Lower

British Pound Plummets as UK Budget Statement, Unemployment Rate Highlights an Economy in Distress
The British pound was close to being the weakest of the majors (that honor went to the New Zealand dollar), as a series of reports from the UK showed that the economic picture remains incredibly bleak. The Bank of England's April meeting minutes showed that the Monetary Policy Committee (MPC) voted unanimously in favor of leaving the Bank Rate at 0.50 percent and to continue their quantitative easing (QE) program. They also said that there was a high degree of uncertainty over the amount of asset purchases that would be necessary to keep inflation at target, and if the evidence warranted it, the Committee could reduce or expand their program.

The more troubling news came from the UK's labor report and the delivery of the UK's annual budget statement. Indeed, the UK's ILO unemployment rate hit a nearly 12-year high of 6.7 percent in February from 6.5 percent, while jobless claims rose by 73,700 in March, marking the 13th straight increase. Meanwhile, UK Chancellor of the Exchequer Alistair Darling announced a huge increase in planned borrowing to 175 billion pounds this fiscal year, which represents 12.4 percent of GDP, while borrowing will amount to 173 billion pounds in the 2010 fiscal year. Spending will go toward a variety of efforts meant to spur economic growth, including giving money to drivers who trade in old cars for new ones, an employment package, help for businesses, and assistance for homeowners (Darling's full speech can be viewed here). Shortly after, the Debt Management Office said that it plan on selling 220 billion pounds worth of gilts through March 2010, which was much more than anticipated, and the prospect of broadly lower interest rates only put the British pound under additional pressure. Adding to the mix, the International Monetary Fund (IMF) revised their global growth outlooks and called for a 4.1 percent contraction this year.

Australian Dollar, New Zealand Dollar Remain Laggards as Carry Trades Fall
The Australian dollar and New Zealand dollar - the highest yielding currencies and a critical component of the classic carry trade - both fell against many of the majors, with the exception of the British pound, as demand for risky assets remains weak. This could remain the case over the next few weeks amidst uncertainties about the health of financial institutions ahead of the release of the US government's stress tests on 19 banks. Australian economic data also weighed on the Aussie, as the annual rate of consumer price growth slowed to 2.5 percent in Q1 from 3.7 percent, marking the weakest pace since Q3 2007. After the Reserve Bank of Australia surprisingly cut their cash rate target by 25 basis points to 3.00 percent on April 7, RBA Governor Glenn Stevens indicated that the RBA may leave rates unchanged going forward as the current stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead. Nevertheless, if we start to see consumer price growth fall below the lower band of the RBA's 2 - 3 percent target range, there may be an increased risk that the central bank will cut rates again.

Canadian Dollar Mixed Ahead of Canadian Retail Sales on Thursday
The Canadian dollar ended Wednesday on a mixed note, as the currency gained against the other commodity dollars and the British pound, but fell versus the US dollar, Swiss franc, euro, and Japanese yen. Looking to USD/CAD, the pair has spent the past day or so testing a region of resistance at 1.2390 - 1.2500, but traders could see more directional moves on Thursday as the release of Canadian retail sales could prove to be disappointing. In fact, spending is anticipated to have fallen during February at a rate of 0.3 percent. Indeed, with unemployment rates rising and business activity slowing, continued declines in retail sales are almost sure to come. If the indicator falls in line with or more than expectations, the Canadian dollar could pull back further. However, if retail sales actually rise, the Canadian dollar could surge in response, especially since the Bank of Canada has indicated that they plan on leaving rates unchanged at 0.25 percent through Q2 2010.

Related Article: Canadian Dollar Tumbles as Bank of Canada Surprises with 25bp Cut to 0.25%

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Written by: Terri Belkas, Currency Strategist for