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Risk Remains Off after US and Canadian Data

Kathy Lien, Director of Currency Research, GFT

This morning's larger than expected U.S. trade deficit barely put a dent into the dollar's rally. The dollar is rising because concerns about Europe returned after European and U.S. central bank officials failed to provide any hope for investors this week.  They let 2 very high profile opportunities to tell the world know that they are ready to increase monetary support slip by, and currencies and equities have been punished as a result.  Fitch's downgrade of Spain added salt to the wound and now risk appetite and the outlook for the FX market is in the hands of European policymakers.  Spain needs a bailout and the only question is when they will finally admit it.  

A larger than expected U.S. trade deficit won't change the outlook for the U.S. economy or make the Federal Reserve any more dovish.  In the month of April, the trade deficit narrowed to $50.1 billion from $52.6 billion.  Economists had hoped that the balance would rise back above  -$50 billion but weak global demand prevented that from happening. Along with the downward revision to the past month's report, trade activity will contribute negatively to GDP growth.  

Up North, Canada also suffered from slower global growth as the country's trade surplus turned into a deficit.  For the month of April, Canada's trade balance was -0.37 billion versus a downwardly revised 0.15 billion in March.  It was a tough morning for Canada which explains the weakness in the Canadian dollar.  Aside from reporting a trade deficit, job growth slowed materially while housing starts declined.  After 2 solid months of strong employment gains, only a mere 7.7k jobs were added last month - nearly all of which were part time work.  The unemployment rate remained unchanged at 7.3 percent.  Housing starts on the other hand dropped to 211.4k from 243.8k.  When the Bank of Canada met earlier this week, they held onto their belief that it may soon be time to unwind monetary stimulus.  With asset markets falling, oil prices declining and economic data weakening, it will be difficult for them to justify one this year.