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More Bad News Means Demand for Safe Haven FX

Kathy Lien, Director of Currency Research, GFT

Risk FX continues to perform poorly this morning with the euro, Australian and New Zealand dollars falling to new year to date lows against the greenback.  The lack of fresh news flow from Greece is giving investors more time to consider the growing possibility of a Greek euro exit.  In fact, U.K. Prime Minister Cameron added fuel to the fire by saying that the June elections in Greece should be a choice about euro membership.  Merkel was previously quoted making the same statement that was later denied.  Nonetheless it is clear that European officials and the market in general wants Greece to just pull the trigger and make a decision so they can deal with the consequences and move on. Being in limbo waiting on Greece has only increased the volatility in the financial markets.   Although the EUR/USD and other major currencies are off earlier lows, the ongoing uncertainty should continue to drive investors into the U.S. dollar and Japanese Yen, which have performed extremely well this month. 

Disappointing Canadian and U.K. retail sales numbers along with rating agency Fitch's comment that non-resident investors are pulling out of Spain certainly isn't helping.  Europe's troubles are posing a risk to consumer demand around the world by driving global asset prices lower.  The Canadian dollar weakened after the retail sales report that showed consumer spending in Canada rising 0.4 percent in March. Although this was in line with expectations, core retail sales growth slowed to 0.1 from 0.5 percent.  Recent comments from the Bank of Canada suggests that they are gearing up to raise interest rates and while the labor market is healthy, soft consumer demand could cause refrain from them doing so quickly. 

As we wrote in our note last night, very little is expected from today's informal EU Summit dinner.  The President of the EC has made it clear that this is a meeting to prepare for the June meeting.  The Bank of Japan kept monetary policy unchanged last night while the Bank of England minutes revealed an 8 to 1 decision to leave asset purchases unchanged.  While MPC members voted the same way in May as they did in April, they indicated that more stimulus is still possible by saying their decision to halt bond purchases this month was "finely balanced."  Considering the 1.0 percent decline in U.K. retail sales, the recent slowdown in annualized consumer price growth and dovish comments from BoE member Posen, who said his decision to withdraw his support for more stimulus is premature, the next time they meet, the tone should be far more dovish.  Even BoE member Bean admitted this morning that QE may need to be restarted if economic conditions weaken. 

U.S. new home sales are scheduled for release this morning at 10am ET.  A rebound in housing demand is expected after the sharp decline in March.  The rise in existing home sales and increase in prices suggests that the housing market is recovering, which should be also evident in today's new home sales report. Yet at best, the housing market number will only trigger a small reaction in the U.S. dollar because unfortunately a good number will not be enough to reverse market sentiment. 

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