US Dollar Continues to Weaken, Hitting 20 Yr Lows Against British Pound and New Zealand Dollar

· US Dollar Continues to Weaken, Hitting 20 Year Lows Against British Pound and New Zealand Dollar
· Euro Aims for All Time Highs
· Canadian Dollar Surges to Fresh Yearly High on Strong Demand for Canadian Securities

US Dollar- With no significant data on the US calendar, there is nothing preventing traders from selling US dollars. In fact, the dollar hit fresh 26 year lows against the British pound, 24 year lows against the New Zealand dollar and 2.5 year lows against the Euro before recovering. The recovery however was shallow as the EUR/USD, GBP/USD and NZD/USD all ended up back in positive territory. This is not a reflection of the market’s distaste for the US dollar or their pessimism about the outlook for the US economy. Instead, it is a reflection of the market’s voracious appetite for yield. Currency traders refuse to give up on carry trades and the major intraday reversals in USD/JPY and NZD/JPY are evidence of that. It is probably not a coincidence that the Dow Jones Industrial Average also hit an all-time high today. The weakness in the US dollar is helping to make US stocks a good value for foreign investors. We expect the Treasury’s reports on net foreign purchases of US securities to be strong in the next few months as the demand for both US stocks and bonds remain robust. Looking ahead we are expecting leading indicators, jobless claims and the Philly Fed report. The rise in the stock market should help to boost leading indicators while jobless claims are predicted to have dropped last week after the prior week’s sharp surge. This makes the Philly Fed survey the event risk for the day. Even though the Empire State manufacturing survey rebounded far less than expected, the forecasts for the rebound in the Philly Fed survey is already very modest, which means that it may not be hard for the data to surprise to the upside. The more important question to ask however is whether this will matter. There is no doubt that the US dollar is oversold, but the only turn that will probably see is in USD/JPY and not in the EUR/USD or GBP/USD.

Euro – The Euro is one step closer to its all time high after having taken out its 2 year high of 1.3594 this morning. With no major data on the Eurozone calendar, the latest push has been sparked by nothing other than more hawkish commentary from European Central Bank officials. ECB member Weber was the latest to remind the markets of upside inflation risk by saying that the rebound in the Eurozone economy will push wages and overall inflation higher. ECB member Ordonez noted that interest rates remain accommodative while the head of the Luxembourg Central Bank said flat out that he sees higher interests this year. From every angle, the ECB needs to raise interest rates and they believe in it and so does the market. For this reason alone, the Euro has the fundamental support to hit fresh all-time highs. German producer prices and Italian industrial orders are due for release tomorrow. Both are expected to reflect an overall rebound in the Eurozone economy. We are also expecting the ZEW survey for Switzerland. The strength of recent economic data should help to boost overall sentiment.

British Pound – The British pound hit a fresh 26 year high today. Even though it gave back all of its gains in the European trading session, the rebound in the late US session was so strong that it drove the GBP/USD back into positive territory. As we expected, the minutes from the last monetary policy meeting revealed a more hawkish voting record with seven members voting to keep rates unchanged and two members voting to raise them. Even though their inflation assessment was more muted than the market expecting, this does matter since the sharp increases in consumer prices, producer prices and average earnings reported since then indicate otherwise. Today, wages jumped by 4.6 percent, which negates the policy makers’ arguments that there has been “little pickup in pay pressures.” The Bank of England is on track to raise interest rates at least once and most likely twice this year. This should help the British pound record even higher levels in the days to come against both the US dollar and Japanese Yen.

Japanese Yen – The Yen crosses opened the US session sharply lower after EU Junker expressed criticism for one-way bets in the currency market. Europeans are beginning to express their dissatisfaction with the recent weakness in the Japanese Yen but until the US becomes concerned, it is unlikely that currency traders will care. Expect the recent weakness in the Japanese Yen to have a profound impact on the earnings of Japanese exporters. The record high that the Dow reached today should help spur sharp gains in the Nikkei overnight. Looking ahead, we continue to only have secondary data from Japan. The country is releasing the tertiary industry index for the month of February. With lackluster economic growth, the tertiary number should do little to stem the currency’s slide. The Bank of Japan however will be releasing their monthly survey tonight which could lead to some Asia session activity.

Commodity Dollars (AUD, NZD, CAD) – The Commodity Currencies extended their rallies as the market continues to drive up high yielding currencies. The move was purely based upon sentiment since the commodity markets were flat on the day. Economic data also surprised to the downside with New Zealand consumer prices growing by 0.5 percent instead of the 0.6 percent expected by the markets. Food prices were also flat in the first quarter. Australian consumer confidence dropped from 3.7 percent to -0.2 percent in the month of April. Although sentiment is lower, it still remains near 20 month highs. The only positive surprise came from Canada, which reported a sharp rise in net foreign purchases of Canadian securities. The market was looking for an outflow of -C$1.5B, but Canada actually reported an inflow of C$4.8B. This sharp upward surprise sent the Canadian dollar soaring against the US dollar, sending the CAD to fresh year to date highs. Looking ahead, we continue to still expect more data from Canada and Australia. Australia will be reporting consumer inflation expectations while Canada releases its own report on consumer prices. Both should reflect the global increase in inflationary pressures and to continue to be positive for those respective currencies.

By Kathy Lien, Chief Strategist of