As market participants take a deep breath and reflect on last Friday’s significant economic data releases, the result is a foreign exchange landscape that is beginning the week with some cautious chop. The greenback is giving back some of its gains from last week, but still holding relatively firm against the majors given the positive momentum the dollar index carried into the weekend. The big dollar took a bit of a hit during early European trade when a French official was quoted saying President Obama told the G7 summit that the strong American dollar was a problem; however, the White House was quick to deny the statement, which in turn, helped stem any further losses in the DXY. Looking past the market’s headline-influenced gyrations, the broader underlying theme to the market is one that supports the greenback, with Friday’s employment report likely giving the Federal Reserve confidence that a rate hike in the latter half of 2015 will be justified. We would expect that the unfolding rebound in second quarter growth, coupled with the continued improvement in the labour market, will help the DXY endure with its recovery after the corrective period experienced from March to May. The economic calendar is relatively light for the USD during the week, though retail sales on Thursday will be a major focus for traders given the softness experienced in this data set for the month of April. The disappointing April print that suggested the rough ride for consumer demand didn’t vanish after the conclusion of the first quarter has been a thorn in side for the DXY bulls, though expectations are to see a sharp rebound in spending for May after incomes, consumer confidence, and jobs all have been on the rise throughout the second quarter.
Turning our attention eastward, there were a few notable developments released Sunday night in Asia. The Japanese yen is managing to make some small strides against the greenback after final Q1 GDP growth numbers were revised higher to an annualized reading of 3.9%. Originally reported at a growth rate of 2.4%, positive revisions to capital expenditures helped propel the final GDP reading higher, and pushing expectations out further of when, or if, the Bank of Japan will expand their current asset purchase program. The Nikkei finished its session essentially unchanged, while USDJPY has come off the highs registered on Friday in the wake of the better than expected Non-Farm Payroll report out of the US.
Elsewhere in Asia, Chinese trade balance numbers ballooned close to the highs seen back in the February-March period when the lunar holiday was thought to have distorted trade flows. The May trade balance widened to $59.5bln from the $34.1bln registered in April, and while exports decreased by less than expected with only a 2.5% slide, imports fell off a cliff a and registered a 17.6% drop after the 16.4% tumble in April. The disappointing trade figures confirm the struggles the Chinese economy is currently facing, though market participants seem to be betting the government will step in to help prop up economic growth with more lenient monetary policy, as the Shanghai Comp rallied 2.1% on its session. It’s hard to see the precipitous decline in imports as having any sort of positive implications for export-intensive countries, though the Australian and Canadian dollars are both up against the big dollar this morning, a result of profit taking in the USD as opposed to strength in commodity markets.
Speaking of the Canadian dollar, the loonie is making further strides against the USD to start the week, building on Friday’s whipsaw price action that saw USDCAD retreat after a strong employment report in Canada helped dissuade fears the oil shock would linger past the first quarter. While the Canadian employment report was unequivocally an optimistic release, we would caution that the volatile nature of the jobs numbers in Canada warrant the need of confirmation in next month’s numbers before a resounding declaration the oil price shock has run its course. Additional gains for the loonie today have come from housing starts and building permits which both saw prints come in much better than expected. From a technical perspective USDCAD is at a level of fairly strong support, though a daily close slightly lower from current levels could precipitate further profiting taking for the pair, and spur a short-term consolidation. At the same time, if the loonie can’t muster further gains beyond the strength witnessed this morning and the greenback can withstand the early onslaught, it is likely the bulls will remain in control of USDCAD and the corrective price action will be short lived.
Further reading:
USD/JPY: Trading the US JOLTS Jobs Openings
USD Faces Further Upside Risk; EUR Rallies Remain A Sell – Credit Agricole
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