The US dollar was initially stronger versus the Euro, Swiss franc, British pound and Japanese yen Friday, but its gains gradually faded into the US session. The Euro gave way a little during the European session upon the release of German retail sales data which turned out to be quite horrid at -1.7% m/m and -1% compared to a year ago.
Focus was then shifted to the recessionary-like conditions in the US as weak US economic data came in one after another. US consumer spending slowed in April as income gains weakened: Personal income rose by 0.2% in April, in line with expectations, following a revised 0.4% rise in March (was 0.3%). Personal spending rose by 0.2%, also as expected, following a 0.4% gain in March.
The Chicago PMI business index rose to 49.1 in May, better than forecast, from 48.3 in April. Although this marks the fourth straight month of contraction in US business activity, the business slowdown isn’t much a surprise. Meanwhile, core PCE deflator, an inflation index closely followed by the Fed, excluding food and fuel, rose 0.1% in April after a 0.2% gain the previous month. It was up 2.1% from a year ago.
Basically, the news today wasn’t earth-shattering and as we head into the weekend, we expect currency movements to be tame and long dollar profit-taking action to dominate.
Canadian Economy In Trouble
While the whole world is worried about the slowdown in the US, Canada has to deal with a shocker in its backyard today. For the first time in almost 5 years, Canada’s economy contracted in the first quarter. Its GDP shrank an annualized 0.3% (0.4% gain expected) in January through March following an 0.8% growth in the fourth quarter. On a quarterly basis, GDP fell 0.1% after growing 0.2% previously.
This data is unexpected, and compared with the 0.9% gain in the US economy in 1Q, it seems even more unreal. Vehicles and parts production were the hardest hit, accounting for 40% of the fall in manufacturing. The Canadian dollar immediately fell against the US dollar after the news release. We think that the Bank of Canada may be forced to cut interest rates again next month.
USD/CHF reached the initial target around 1.0530, and then heavy shorting pressure pushed the currency pair down to below 1.0500. EUR/USD touched an intraday low around 1.5460 but then bounced back up above 1.5500 when Swissy met resistance at 1.0530.