Oh, CNDA!

Canadian Prime Minister Stephen Harper isn’t too pleased that Obama rejected the Keystone XL pipeline, a vessel that would have shipped crude from Alberta’s oil sands to the Gulf of Mexico. However, on Thursday, Harper described the exporting of Canadian energy as a “national priority” and pledged to fast-track regulatory approval.

Dollar Remains Weak Ahead of FOMC, Housing Data Fails to Help

As the Federal Reserve begins their two day monetary policy meeting, the U.S. dollar is trading lower against all of the major currencies. The dollar's weakness is due in large part to the warning by Fitch that the U.S. debt rating could be put on negative watch if the U.S. debt ceiling is not increased by August 2nd. Fitch even went one step further than they did two weeks ago by adding that the U.S.'could be moved to restricted default if the Aug 15th coupon payment is not met.  Having received significant criticism during the financial crisis for being behind the curve, rating agencies are on the defensive issuing downgrade warnings when the chance of the U.S. actually missing a coupon payment is slim. With that in mind, the impact of Fitch's warning was minimal because they made the same threat 2 weeks ago. Also, Moody’s and Standard & Poor’s downgraded their outlook on U.S. debt on June 2 and April 18, respectively so Fitch’s warning is not as big of deal because they only issued a warning while S&P and Moody's actually downgraded the outlook for U.S. debt. Fitch is still trailing behind other rating agencies and the market is fully aware of that.

Existing Home Sales

Existing home sales was the only piece of U.S. data on the calendar today and according to the latest report, sales declined 3.8 percent in May. While the drop in existing home sales was smaller than investors had anticipated, the large downard revision to the prior month's report and the drop to a 6 month low does not bode well for the U.S. economy.  As long as home sales are below 5 million, the housing market is in the trouble. The only real silver lining in the housing data was the rise in home prices - every region in the country reported a rise in the average price of a home sold which means one of two things - either sellers are becoming confident about the outlook for the housing market or they are willing to hold out longer for a higher price

QE Coming to An End

By the end of this month, the Federal Reserve will have completed its asset purchase program, bringing its second round of Quantitative Easing to an end.  Last month, Bernanke laid out the Fed's plans once QE is completed and he will most likely reassure investors tomorrow that the game plan of reinvesting principal payments on maturing securities remains in place.  The end of QE2 could actually help the dollar.  When the first round of Quantitative Easing ended around April 2010,  the dollar index rose 10 percent between April and mid June. Over the next few months it trended lower as investors considered the possibility of QE2.  Since QE3 is not likely this time around, the end of QE2 could spark a dollar rally based on the prospect of higher yields and less concerns about inflation or currency debasement. We'll be publishing our FOMC outlook later this afternoon so stayed tuned!

Canadian Retail Sales Fall Short

Meanwhile Canadian retail sales fell short of expectations in the month of April. Not only was the prior month's report revised downwards but consumer spending rose only 0.3 percent. The real disappointment however was in retail sales less autos which was flat against a forecast for 0.6 percent growth.  After a very weak March, investors were hoping for a sizeable rebound in April, but a weak labor market and slow global growth prevented any meaningful pickup in consumer spending.  The latest retail sales number will make the Bank of Canada weary of tightening monetary policy prematurely.  The BoC is in the same position as many other central - they have the flexibility to sit and wait until the economic outlook for Canada improves and for the uncertainty to Europe which also affects Canadian markets to subside. The Canadian dollar managed to shrug off the weaker retail sales report easily due thank to a sharp 1.0 percent rise in leading indicators.  The retail sales number was from 2 months ago but leading indicators reflects economic activity last month, giving the BoC hope that things are not all bad.

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. 

FX Volatiltiy - US, Canadian Trade and ECB

Although everyone is focused on ECB President Trichet's press conference, today is also the first day this week with any meaningful U.S. economic data. Thankfully the latest reports were not particularly damaging to the U.S. dollar with a rise in jobless claims offset by a smaller trade deficit. Jobless claims exceeded 400k for the ninth consecutive week but the minor increase from 426k to 427k indicates that there hasn't been a significant deterioration in the labor market. However we are only into the first week of June and so it is far too early to tell which way claims will go. Both the 4 week moving average and continuing claims trickled lower, providing support to the U.S. dollar. The U.S. trade deficit also narrowed to -$43.7B in the month of April from -$46.8B the previous month. The larger improvement was fueled by a 1.3 percent increase in exports and 0.4 percent decline in imports. The data suggests that the U.S. dollar is doing its job of promoting foreign demand and keeping U.S. demand domestic. Of course imports largely benefited from the sharp increase in commodity prices that month - the average price of imported crude oil in April reached its highest level since September 2008. Excluding petroleum, the trade deficit actually increased. After weeks of disappointments in U.S. data, this morning's upside surprises should bring some relief to the U.S. dollar.

CAD Trade Suffers from Weaker US Demand

Up North, Canada's trade deficit widened to -CAD924 million from -CAD$417 million. Although commodity prices increased, Canada suffered from weaker demand from its largest trading partner - the U.S. Export volumes dropped 1.1 percent that month while import volumes rose 1 percent. The trade numbers from Canada show just how much of an impact exchange rates can have on demand. In April, the U.S. dollar fell to its weakest level against the Canadian dollar in more than 3 years and this will naturally affect U.S. demand. The stronger U.S. and weaker Canadian trade numbers should keep USD/CAD well supported.

ECB – Look Beyond the Volatility

In terms of the ECB, Central Bank President Trichet uttered the magic words "strong vigilance" this morning, but to everyone's surprise, the EUR/USD came crashing down. The sell-off in the EUR/USD is a classic buy the rumor, sell the news reaction and we do not expect it to last. Nothing in Trichet's commentary was bearish for the euro and if anything, he made it clear in as many ways possible that interest rates will be increased next month. And if we needed any more clarity, Trichet said "strong vigilance is needed to contain inflation" which means "ECB may raise rates next month." In addition to his unambiguously hawkish comments, the ECB also raised its 2011 GDP forecasts from a range of 1.3% - 2.1% to 1.5% - 2.3%. There has been a lot of volatility since Trichet started speaking and this will continue on until the press conference is over, but the losses in the EUR/USD should be limited because once the dust settles, the key takeaway is that the ECB is the only central bank raising interest rates at this time. Also, Trichet's comments were a slap in the face for anyone hoping that the ECB will use monetary policy to save the region from its debt crisis. More on the ECB from our colleague Boris Schlossberg later this morning.d

CAD Receives Mild Boost from IVEY PMI

It may be a quiet morning in the foreign exchange market but it is a busy week for many countries around the world including the commodity producing countries such as Canada, Australia and New Zealand. The Reserve Banks of Australia and New Zealand have monetary policy meetings this week where investors will be listening in closely for clues on when the central bank will alter interest rates again.  None of the central banks are expected to change interest rates, but their comments could still trigger volatility in currencies. 

Canada GDP

Canada GDP for January comes in at 0.5% vs 0.5% in December The YoY measure rose to 3.3% from a revised 3.3% prior The USDCAD has moved lower on the news staying below the 100 bar MA on the 5 minute chart. The low for March (lowest level since 2007) comes in at 0.9666. This is the next key target level on the downside.

Japan Megaquake And Tsunami - Gold Mixed As Yen Surges Against All Currencies

From GoldCore Japan Megaquake and Tsunami - Gold Mixed as Yen Surges against All Currencies The massive earthquake and tsunami that has rocked Japan is being digested by markets and the economic ramifications and uncertainty is leading to risk aversion.

USD/CAD Falls on Strong Canadian Retail Sales

    The 1.0242 level is the 100 hour MA. The price needs to breach the 38.2% retracement to keep the bearish bias . Then the 1.0205 level which has been a key level for the pair (was the original low spike low from October 2009.  

Bank of Canada Leaves Rates Unchanged

See weaker US recovery Cuts 2010 growth to 3% from 3.5% Currency tension could hurt global economy 2011 growth cut to 2.3% from 2.9% 2012 raised to 2.6% from 2.2% Larger than forecast output GDP CPI to reach 2% by by end of 2012 Global stimulus largely over Global shift to fiscal consolidation Any further moves to be carefully considered The USDCAD is approaching the 50% retracement, 200 day MA and 100 day MA at 1.0324, 1.0349 and 1.0357  

Five Critical ETFs with "Golden Crosses"

“Death crosses” were a popular topic in the summertime. That’s the bad omen for a given asset when its shorter-term 50-day moving average crosses below its longer-term 200-day moving average.