USD Needs More than Bad Euro News, Growth still a Concern

The USD slumped on Thursday after disappointing readings on GDP and initial jobless claims. The overall tone of markets was mixed with stocks flat, bonds rallying, copper higher and oil lower. This spilled over into fx where the odd combination of NZD, AUD and JPY were the top performers while CAD joined USD at the bottom of the pile. Japanese inflation and retail sales are the highlight of the Asia-Pacific session.

US GDP was unrevised at +1.8% in Q1, falling short of the +2.1% consensus. Weakness came from the important consumer spending component which was downgraded to 2.2% from 2.7% while some strength came from inventory building. The report and recent economic data show the US is in a soft patch. Expect to see Q2 forecasts downgraded to below 3.0%. Another headwind facing the US is employment as jobless claims hit 424K compared to the 400K consensus.

Stocks sold off initially but later rebounded into positive territory before closing nearly unchanged. The Treasury market interpreted the news more bearishly, pushing the 10-year yield below the 200-day moving average to 3.06%. A 7-year auction was also very strong. The bond market is flashing disinflationary and safe haven signals. Lower yields are a US dollar negative signal as long as growth in the US doesnt slow to the point where it will wound US trading partners. This may already be starting as CAD which was the G10 worst performer today on worries about its biggest trading partner and a small decline in oil.

Asia-Pacific Preview

Japan releases April CPI figures at 2330 GMT with a 0.3% y/y rise expected in the national reading but a 0.1% y/y price decline excluding food and energy. With Japanese inflation heading in the right direction, the risk of futher BOJ easing is diminished. Policymakers may, however, face pressure to act on economic weakness. Twenty minutes following CPI, retail trade is expected to rebound 2.6% after a quake-induced 7.8% fall in March. A reading close to zero will boost USD/JPY.

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