The US dollar softened again today, as gains in the Euro and Canadian dollar pushed the greenback to fresh 15-year lows on a trade-weighted basis amidst weak US economic data. The Euro stretched to a fresh record high of $1.4191 this morning, but a slight retracement suggests that the recent rally may be a bit overextended - for now at least.
Extreme speculative positioning levels will make it difficult for the Euro to press higher without a short-term unwind of EUR/USD longs, and the Canadian dollar faces similar circumstances. Furthermore, USD/CAD bulls have thus far been able to defend the psychologically important C$1.00 level against the US dollar, though the pair hit a new 30-year low of C$0.9977 this morning. Meanwhile, as our own Technical Strategist Jamie Saettele called for recently, GBP/USD has started to stage a rally. The Japanese Yen has not been quite as fortunate, as the currency has given up nearly all of its early morning gains against the greenback with the help of a mild pick up in the S&P 500 Index.
Economic data out of the US highlighted two factors that we are already well aware of: Q2 GDP was robust, and the housing recession continues to worsen. While, Q2 GDP was revised down to an annualized 3.8 percent from prior estimates of 4.0 percent, this still represents the fastest pace of growth in more than a year and a strong pick up from the tepid 0.6 percent pace in Q1. The acceleration in expansion from Q1 was marked by a surge in export growth, as the weaker US Dollar helped boost demand. However, more recent reports have not been encouraging, and the release of new home sales for the month of August will only add to the Federal Reserve?s list of worries as the figure fell 8.3 percent to a more than seven-year low of 795,000. Even worse were median prices, which plummeted 7.5 percent from a year ago - the sharpest drop since 1970. With October scheduled to mark the peak of adjustable rate mortgage resets, the combination of rising foreclosures, increasing inventories, tepid demand, and easing prices may only create a downward spiral for the sector. Furthermore, with consumer confidence taking a hit and labor market conditions starting to deteriorate, there are well-warranted concerns that the contraction in the housing market will take consumer spending out with it. This was part of the reason the Federal Reserve cut rates last week, and these factors will remain in focus as traders speculate over whether the central bank will slash rates again in October.
However, there was a strong point in today?s labor market data. US jobless claims unexpectedly fell to a four-month low of 298,000, helping to quell concerns about a weakening labor market and spark speculation that next week?s non-farm payrolls report could be encouraging. Furthermore, the less-volatile four-week moving average dropped to 311,500 from 321,250, suggesting that this may not be a one-off event. Despite all of the other dour data we?ve seen as of late, a resilient NFP figure could be the one piece of major event risk to trigger a rally for the greenback.
US equity markets were mixed on the day, with the Dow Jones Industrial Average down slightly by .08 points to 13,878. The S&P 500 fared slightly better, rising 2.17 points to 1,528. Nevertheless, both the Dow and the S&P 500 remains a stone?s throw away from their July highs as investors have remained surprisingly optimistic.
US Treasury Yields fell on increased economic uncertainty, with the key 2-Year Note losing 2 basis points to hold below the 4.00 percent marker at 3.965 percent. A drop in shorter-term government bond yields signals continued risk aversion and expectations that the US Federal Reserve will cut interest rates further through the medium term. Options traders have priced in an approximate 50 percent probability that the central bank will cut rates to 4.50 percent on October 31, which remains an undoubtedly bearish sign for the US dollar, but an encouraging factor for the equity markets.
Written by Terri Belkas, Currency Analyst for DailyFX.com