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US Dollar, Japanese Yen Down Post GDP, FOMC - Retracements on Thursday?
The US dollar and Japanese yen were the weakest of the majors as a surge in risk appetite provided a big boost to risky assets, including the higher-yielding commodity dollars and stocks. The sharpest moves occurred over the course of the morning, but cooled down over the afternoon as the Federal Open Market Committee's (FOMC) latest policy statement didn't veer far from what they said on March 18, as the central bank opted to leave the fed funds target range unchanged at 0.0 percent - 0.25 percent and said that conditions are likely to warrant exceptionally low levels...for an extended period. Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn.
That said, there were tinges of optimism within the policy statement as the FOMC qualified their initial, repeated remark that data indicates that the economic contraction has continued by adding that the pace of contraction appears to be somewhat slower. This is generally in line with news we've been hearing lately, including the
surprising surge in US consumer confidence. However, the results of Q1 GDP reflect a somewhat different picture.
Indeed, the US economy contracted more than expected at the start of the year, as GDP fell 6.1 percent against forecasts for a 4.7 percent drop, after Q4 GDP plunged 6.3 percent. The breakdown of the report shows that a massive 51.8 percent fall in gross private investment was responsible for a bulk of the drop, with both nonresidential and residential showing declines of about 40 percent. Meanwhile, personal consumption actually increased 2.2 percent, led by durable goods and services, and net exports were positive. That said, trade flows were down very sharply, as exports tumbled 30 percent and imports slumped 34.1 percent. Since this was the advanced reading, there will be two opportunities for this result to be revised, but ultimately, the news suggests that the recession may not be getting worse, but it isn't substantially improving either.
Looking ahead to Thursday, US personal income is projected to have dropped by 0.2 percent in March, marking the second straight contraction, while personal spending is anticipated to dip 0.1 percent. If these results prove to be surprisingly weak, they will suggest that Q1 GDP will see downward revisions, and the news could also hurt risk appetite. In fact, given the extent of the US dollar and Japanese yen pullbacks on Wednesday, there is potential for broad retracements on Thursday, especially if rumors that Chrysler will file for bankruptcy come to fruition.