FX: It Has Been a Tough Week for Risk

Currencies continued to trade lower this morning as the back and forth on Greece adds pressure on the market. Interestingly enough, the big winner today was not the U.S. dollar or the Swiss Franc, but the Japanese Yen which traded higher against all of the major currencies. This tells us that even though safe haven currencies are in demand, investors are not extraordinarily nervous or particularly bearish U.S. dollars today because if they were, USD/JPY would be trading below 80 and USD/CHF would be at a record low. Fed President Dudley expressed concern about the economic outlook and warned that growth in the second quarter may be subpar, which is most likely true but coming from one of the most dovish members of the FOMC, his comments only state the obvious.

It has been a very quiet week in terms of U.S. data with import prices being the only number released this morning. The rise in inflationary pressures in the U.S. compared to other parts of the world shows just how much of an impact exchange rates can have on prices. In the U.S. for example, import prices rose 0.2 percent, which was a slower pace of growth compared to the 2.1 percent rise the previous month, but remarkably stronger than the -0.7 percent forecast. Even though oil prices fell significantly last month, the overall weakness of the U.S. dollar is mitigating deflation risks and increasing inflation. In the U.K. on the other hand, producer prices declined last month while Germany reported zero consumer and wholesale price growth. The British pound and euro rallied significantly since the beginning of the year and to the delight of policymakers, the strength of the currency has helped to reduce inflation. This dynamic explains why we haven't heard a peep from anyone but the Bank of Japan about the recent volatility in currencies.

Earlier this morning, the Canadian dollar soared after employment numbers printed slightly better than expected. A total of 22.3k Canadians found new work last month, down from 58.3k. Job growth moderated after a jumping in April but the pace of growth was slightly stronger than forecast. Full time hires also increased by 32.9k while the number of part time workers declined by 10.6k. An increase in full time hires is always more valuable than a rise in part time workers because it suggests that businesses feel confident enough to commit to a full time employees.  USD/CAD has fallen since the release but its losses have been limited.

It has been a tough week for risk and next week could continue to be a challenging one with a heavy dose of economic data that could show more holes in the global recovery.