After a 3 day weekend for North American traders, we find ourselves in the same place as where we left off last week with the U.S. dollar trading higher against all of the major currencies. While the rally in the greenback is modest, its performance indicates that risk aversion still dominates trading. According to S&P Case-Shiller, house prices were largely unchanged in the month of March. More recent releases such as the existing home sales report has shown an uptick, making today's housing market data less significant. In contrast to the University of Michigan consumer sentiment index which showed an improvement in confidence, according to the Conference Board, consumers grew less optimistic in the month of May. The consumer confidence index dropped to a 4 month low of 64.9 from 68.7. The slowdown in job growth and the slide in equities have weighed on sentiment as the ripples from the Europe's sovereign debt crisis hit U.S. shores. Although we have seen a number of improvements in U.S. data over the past month, this is no time for the Fed to take their eyes off the economy. The most important event risk this week for the U.S. will be non-farm payrolls and the low level of jobless claims are consistent with stronger job growth. If that fails to materialize, the dollar could give up its gains.
It has been a busy morning for the EUR/USD, which traded sharply higher at the European open only to reverse those gains into the North American session. Since then the euro has recovered and is unchanged against the greenback. The record level of EUR/USD short positions and the recent consolidation above 1.25 suggests that those who want to be short euros are already short. In order to convince bottom fishers to join the selling, we would need a significant exacerbation of Europe's sovereign debt crisis and unfortunately the most likely culprit will be Spain. Ten year Spanish bond yields continued to edge closer to the psychologically and financially hobbling 7 percent level, the point that pushed Greece, Portugal and Ireland into begging for a bailout. The only reason why the EUR/USD did not break below 1.25 this morning is because of the hope that the ECB or the European Union will provide a larger backstop for the region. In our opinion, this is wishful thinking ahead of the Greek elections. Currencies and equities have also been supported by China's commitment to stimulating their economy amid reports overnight that the government is accelerating its approvals for investment projects,