Although U.K. traders are off today enjoying the Royal Wedding and liquidity in the foreign exchange market is lighter as a result, this has not stopped investors from taking another stab at selling dollars. The greenback continued to weaken against all of the major currencies with the exception of the Canadian dollar which gave up its gains following disappointing GDP numbers from Canada. With the EUR/USD aiming for 1.50 and the AUD/USD for 1.10, there is little that can stop the parabolic moves in high yield currencies today. Next week is a whole different ballgame with the ECB making a monetary policy announcement (will Trichet tone down his comments?) and the U.S. non-farm payrolls scheduled for release but between now and then, we will probably see the greenback remain under pressure.
The first round of U.S. economic reports this morning showed personal income and personal spending growing more than economists had anticipated. Incomes rose 0.5 percent in March compared to 0.4 percent growth the previous month. Spending growth slowed but not by as much as people had feared with spending rising 0.6 percent compared to an upwardly revised 0.9 percent growth in March. These numbers look a bit more promising than the retail sales and wage growth reports that we saw earlier this month, but the upside surprises are certainly not enough to get hearts beating at the Federal Reserve's. Inflationary pressures are on the rise according to the annualized PCE deflator which rose from 1.6 to 1.8 percent, but core price growth held steady at 0.9 percent. Anyone wondering why the Fed could turn a blind eye to rapidly rising commodity prices that are beginning to feed into core prices just needs to look at PCE Core growth - so far, the impact on core has been nominal. The Chicago PMI report is scheduled for release later this morning followed by the final University of Michigan Consumer Sentiment Report.
Meanwhile up North, the Canadian economy contracted 0.2 percent in the month of February. On an annualized basis, the pace of growth was the slowest since February 2010. According to Statistics Canada "Manufacturing and to a lesser extent, wholesale trade were the main sources of the decline. Service producing industries were essentially unchanged with increases in retail trade, professional and financial services as well as in the public sector offset by decreases in wholesale trade and transportation services." Higher oil prices have driven the Canadian dollar to its highest level in 3 years and even though the Canadian economy is outperforming the U.S. economy, the strength of the Canadian dollar is beginning to have a negative effect on growth. The Bank of Canada will be watching this closely because a further contraction in GDP growth could lead to some pointed comments on the currency.