Although everyone is focused on ECB President Trichet's press conference, today is also the first day this week with any meaningful U.S. economic data. Thankfully the latest reports were not particularly damaging to the U.S. dollar with a rise in jobless claims offset by a smaller trade deficit. Jobless claims exceeded 400k for the ninth consecutive week but the minor increase from 426k to 427k indicates that there hasn't been a significant deterioration in the labor market. However we are only into the first week of June and so it is far too early to tell which way claims will go. Both the 4 week moving average and continuing claims trickled lower, providing support to the U.S. dollar. The U.S. trade deficit also narrowed to -$43.7B in the month of April from -$46.8B the previous month. The larger improvement was fueled by a 1.3 percent increase in exports and 0.4 percent decline in imports. The data suggests that the U.S. dollar is doing its job of promoting foreign demand and keeping U.S. demand domestic. Of course imports largely benefited from the sharp increase in commodity prices that month - the average price of imported crude oil in April reached its highest level since September 2008. Excluding petroleum, the trade deficit actually increased. After weeks of disappointments in U.S. data, this morning's upside surprises should bring some relief to the U.S. dollar.
CAD Trade Suffers from Weaker US Demand
Up North, Canada's trade deficit widened to -CAD924 million from -CAD$417 million. Although commodity prices increased, Canada suffered from weaker demand from its largest trading partner - the U.S. Export volumes dropped 1.1 percent that month while import volumes rose 1 percent. The trade numbers from Canada show just how much of an impact exchange rates can have on demand. In April, the U.S. dollar fell to its weakest level against the Canadian dollar in more than 3 years and this will naturally affect U.S. demand. The stronger U.S. and weaker Canadian trade numbers should keep USD/CAD well supported.
ECB - Look Beyond the Volatility
In terms of the ECB, Central Bank President Trichet uttered the magic words "strong vigilance" this morning, but to everyone's surprise, the EUR/USD came crashing down. The sell-off in the EUR/USD is a classic buy the rumor, sell the news reaction and we do not expect it to last. Nothing in Trichet's commentary was bearish for the euro and if anything, he made it clear in as many ways possible that interest rates will be increased next month. And if we needed any more clarity, Trichet said "strong vigilance is needed to contain inflation" which means "ECB may raise rates next month." In addition to his unambiguously hawkish comments, the ECB also raised its 2011 GDP forecasts from a range of 1.3% - 2.1% to 1.5% - 2.3%. There has been a lot of volatility since Trichet started speaking and this will continue on until the press conference is over, but the losses in the EUR/USD should be limited because once the dust settles, the key takeaway is that the ECB is the only central bank raising interest rates at this time. Also, Trichet's comments were a slap in the face for anyone hoping that the ECB will use monetary policy to save the region from its debt crisis. More on the ECB from our colleague Boris Schlossberg later this morning.
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