Global Themes

The U.S. dollar strengthened Tuesday, boosted by weaker growth in Europe and higher U.S. Treasury yields. The greenback rose broadly with gains against the euro, sterling and Canadian dollar while it jumped to fresh three-month highs against the yen. The euro depreciated after data showed the bloc’s top economy, Germany, grew at a slower than expected pace of 0.3% during the first quarter. Largely as expected U.K. jobs data offered little support to the pound. Optimism in the U.S. economy has helped nudge the yield on the benchmark 10-year Treasury back above 3%. Juicier yields have helped sparked the dollar’s most impressive rally in months and keep it biased higher. Still, how much traction the dollar enjoys out of its latest upswing could hinge on U.S. retail sales which are forecast to rise, albeit at a slower rate of 0.3% in April, half the pace of March’s 0.6% increase.

CAD

The loonie appears headed for a tug of war today given the opposing forces of stronger oil markets and a stronger U.S. currency. Oil jumped by a percent to nearly $72, the highest in years. The greenback may hold the upper hand after good news on the U.S. consumer today underscored rising optimism in the world’s top economy that has the Fed on track to raise rates for a second time this year next month. Canada’s marquee economic events arrive with Friday reports on inflation and retail sales, numbers that could potentially make or break a late May rate hike.

USD

The U.S. dollar racked up more gains after bullish U.S. data pointed to the world’s top economy firing on more cylinders than Europe and Canada. Retail sales rose by 0.3% in April, meeting forecasts, while March spending got revised higher to 0.8% from 0.6%. The Empire State index topped forecasts with a reading over 20 for May. Today’s solid data suggest a near certainty of a Fed rate hike on Jun 13 and won’t undermine prospects of the Fed moving a total of four times this year, a faster pace than its previous forecasts months ago.

YEN

The yen smashed through a key psychological level against the dollar, hitting its weakest in over three months. Rising U.S. Treasury yields are the archnemesis of the lower yielding yen, a move that traditionally steers capital flows to the U.S. and away from Japan which is running a negative base rate (-0.10%) to help keep the world’s No. 3 economy from backsliding. The market also appears to be lightening up on the yen ahead of data Wednesday that’s forecast to show Japan shifted into reverse during the first quarter with forecasts calling for a -0.2% print.

EUR

The euro slipped toward lows for the year after lackluster news on the German economy kept prospects of an ECB interest rate hike from zero on a far horizon. The world’s No. 4 economy grew at a 0.3% pace during the first quarter, which was below forecasts of 0.4%, and half the pace of Q4 when it advanced 0.6%. Meanwhile, data showing German investor optimism in the red for a second straight month and at the lowest level in 5 ½ years suggested that growth remains in a lower gear in the current quarter.

GBP

Sterling weakened against the buck but had its fall slowed somewhat by constructive news on the U.K. job market. Unemployment held at 4.2% in March, the lowest since 1975. The good news came on wages which rose 2.9% in the first quarter and outpaced the nation’s 2.5% rate of inflation, boding better for the outlook for consumer spending. On balance, the data offered a nascent sign of the U.K. economy stabilizing after a recent slowdown. Still, it’s going to take data showing stronger growth to put a pound-positive rate hike from 0.5% more firmly on the table.

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