By DailyFX – The US dollar weakened against every major currency with the exception of the Japanese Yen. Two factors contributed to the dollars decline… … today, namely weak GDP growth and resurgence in carry trade demand.

As we said in our Special Report yesterday, carry trades will die when the
Dow dies. With the Chinese stock market bouncing in reaction to
yesterdays record high in the US stock markets, carry traders have
also returned, triggering impressive rallies in the high yielding
Australian and New Zealand dollars. This strength, which is
predominately against the Japanese Yen has also helped to drive Euro,
British Pound, and Aussie strength against the US dollar. Top that off
with the weakest level of GDP growth since December 2002 and this
explains why the dollar sold off today. In fact, USD/JPY was the only
currency pair to remain stationary which confirms our thesis that carry
is driving overall market activity. The 0.6 percent GDP number is very
troublesome, but the weakness of the US dollar should help to boost
growth in the quarters to come. Personal consumption was strong so the
revision came primarily from weaker inventory and trade. Both the
Monster.com online job index and the employment component of the Chicago
PMI report suggest stronger job growth. But the payrolls derivatives
auction settled at 121,300, which means that traders are expecting a
weaker number that is more in line with the ADP survey. Job growth is
key to the sustainability of the US economy. We have long said that
even though the housing market is weak, as long as people have jobs,
they will be able to service their mortgages. Therefore weak job
numbers could be what topples the US stock market and the US dollar.
The odds are in favor of a stronger report however given the extremely
low levels of jobless claims last month. Our Non-Farm Payrolls Outlook
contains more details on the potential outcome for NFP while traders may
be interested in our Trade the News: NFP Focus Report. Aside from
payrolls, we are also expecting the National ISM manufacturing index.
The weak dollar should continue to help manufacturing conditions
nationally, just as it has in the Chicago region. Should the outcome of
NFP and ISM be aligned, then Friday could be a big breakout day.

Euro: Stuck in a Range Ahead of German Retail Sales

Even though the Euro is stronger today, it is still stuck in its week
long trading range. Economic data was mixed once again. The German ILO
unemployment rate dipped and Eurozone consumer confidence increased, but
at the same time the number of unemployed people increased in Germany.
This data does little to clarify the air on what the European Central
Bank will do beyond June which is capping gains in the Euro. Traders
are holding back from selling the Euro aggressively on the expectation
that the ECB will be increasing rates next month but they are also
holding back from buying it ahead of German retail sales and PMI
manufacturing numbers tomorrow. The retail PMI numbers were very weak
and this suggests that we could also see softer consumer spending in
Germany. Manufacturing PMI has a greater chance of disappointing as
well with corporate profitability likely to be impacted by the strength
of the Euro. Meanwhile over in Switzerland, GDP growth in the first
quarter was the strongest in seven quarters. This is a testament to the
overall health of the Swiss economy and supports the Swiss National
Banks desire to raise interest rates. The government has been very
unhappy with the weakness of the Franc and the growth data indicates
that the economy will be able to weather tighter monetary policy.

British Pound: Weak Data Will Postpone Any Further Rate Hikes

Softer economic data has not stopped the British pound from rallying.
Money supply, house prices, mortgage approvals and consumer confidence
were all weaker than expected. Even though the CBI distributive trades
survey was firmer, it still dropped significantly from the prior month.
Incoming economic data from the UK has been weak which indicates that
even though the members of the monetary policy committee debated between
a 25 and 50bp rate hike, they do not have the fundamental reason to lift
rates again over the next few months. After the hawkish MPC minutes,
traders were expecting another hike as early as July, but with the
economy clearly weakening, the central bank may be forced to hold off
until September, which has led to the pound’s under performance
against the dollar and Euro.

Japanese Yen: Drop in Labor Cash Earnings Adds to Yen Weakness

With the Dow holding steady and the Chinese stock market rallying
overnight, the Japanese Yen is weaker across the board. Carry continues
to be the only thing that is driving the Yen. Economic data released
overnight was hardly impressive. Housing starts and construction orders
were stronger, but still at very low levels. Labor cash earnings were
much weaker than expected indicating that corporations are still not
passing any increases in profitability onto their workers. Despite
hawkish comments from Bank of Japan Nishimura, weak earnings will
continue to prevent the BoJ from lifting rates. Watching the Chinese
stock market and US stock market performance is extremely important for
carry traders. The Chinese government will not be happy with the
recovery in the markets. If stocks do not turn down once again, they
will be forced to make another change to policy. As a result, a free
float may not be out of the question, see our special report for more
details.

Commodity Currencies: Australian and New Zealand Dollars Soar on
Acquisition News

The Australian, New Zealand and Canadian dollars all performed very
well today despite mixed economic data. The strength was driven by
acquisition news from Morgan Stanley Group who snapped up Investa
Properties for AUD 4.7 billion. The Canadian dollar benefitted from
stronger annualized growth in Canada as well as weak US growth.
Australia reported a smaller improvement in the trade deficit but strong
growth in capital expenditures. New Zealand on the other hand reported
a sharp drop in business confidence.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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