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US Dollar Tanks on Shocking New Data

Boris Schlossberg Kathy Lien

The US dollar (USD) was sent sharply lower against all major currencies today after the latest Chicago PMI data showed a stunning contraction reminiscent of recessionary conditions seen years ago.

After fizzling out at the key 1.3125 mark in Asian and early-European trading, EURUSD has been on a tear in today’s North American session on the back of shockingly weak Chicago PMI numbers. The currency pair soared above 1.31, taking out stops above 1.3120 and then 1.3150. For the FederalReserve, which meets later this week, the continual disappointment in US data materially weakens the case for tapering asset purchases.

According to the latest report, manufacturing conditions in the Chicago region contracted for the first time in three-and-a-half years. The index dropped to 49.0 from 52.4 in the month of April, hitting its lowest level since September 2009.

A reading as weak as the one we have seen today reminds us of recessionary conditions, and while one monthly release doesn't make a trend, the data confirms that the pace of the US recovery has in fact slowed.

The activity reading was so weak that investors completely ignored the jump in consumer confidence reported 15 minutes later. According to the Conference Board, consumer sentiment hit its highest level in seven months, which should have been good news for the greenback, but this is a sentiment indicator, whereas the Chicago PMI index is an activity indicator, and therefore, PMI is a more reliable reflection of how the US economy is doing.

Between the drop in the Chicago PMI, Philly Fed, and Empire State manufacturing surveys, we are also looking at a potential miss in tomorrow's ISM manufacturing report.

“Abenomics” Begin to Take Hold in Japan

As a result of today’s Chicago PMI report, the US dollar (USD) has traded lower against all major currencies, with USDJPY dropping to its lowest level in nearly two weeks.

In Japan, the market may have seen the first positive signs of “Abenomics” at work, as the data from Japan surprised to the upside on all fronts. PMI manufacturing rose to 51.1 from 50.4 the month prior, moving steadily further into expansionary territory. The unemployment rate declined to 4.1% from 4.2% as well.

However, perhaps the most encouraging sign for Japanese policymakers was the fact that household spending rose 5.2% versus 1.8% expected. As Japan tries to reflate demand, this number will be key to further activity and growth.

As we have noted so often, USDJPY needs to see an improvement in US data in order to resume its uptrend. Yesterday's pending home sales report was the first positive US data point in weeks, and today's disastrous Chicago PMI report quickly and decisively powered the latest downside move in the pair.

German Data Gives ECB Even More Incentive

In the Eurozone, weaker-than-expected German data put a cap on the pair despite generally positive investment sentiment that helped equities rally strongly.

German retail sales fell for the second consecutive month, declining by -0.3%. Worse, the sales from February were revised lower by -0.6%, suggesting that consumer demand is clearly starting to slow. Overall, retail sales have contracted by -2.8% from a year earlier. The lackluster sales numbers may have been further aggravated by the extremely cold weather, which affected other parts of the economy as well.

On the labor front, German unemployment increased by 4K versus 2K expected, which was slightly worse than the consensus estimate, but markedly better than last month's jump of 14K. Overall, the German rate of unemployment remained at 6.9%.

The news out of Germany shows a clear slowdown in economic activity as the contraction from the periphery is slowly starting to seep into the Eurozone’s core economies. The key question that remains for now is whether the data is bad enough to prompt the European Central Bank (ECB) to act at this month's policy meeting being held this Thursday.

The market is generally convinced that the central bank will lower the benchmark rate by 25 basis points, and while a welcome dose of stimulus, such a move alone is unlikely to have much of an impact on Eurozone growth.

See related: Why an ECB Rate Cut May Not Work

As ECB President Mario Draghi himself admitted, the policy transmission mechanism in Europe is failing as credit conditions in the periphery remain very tight. One potentially positive driver is the rapid decline in periphery sovereign yields, which may, in turn, translate into lower funding costs in that portion of the Eurozone. Indeed, Eurozone banks have reported their best results in years, suggesting that the banking sector may finally be healing.

USD/CAD Aims for a Move to Parity

Elsewhere in North America, the latest GDP data showed that the Canadian economy expanded by 0.3% in the month of February, matching the upwardly revised pace of growth enjoyed in January. On an annualized basis, this brought GDP up to 1.7% from 1.1%, which helped drive the Canadian dollar (CAD) sharply higher against all major currencies.

The outperformance of the Canadian economy and the recent rebound in oil prices should help the loonie sustain these gains, with USDCAD now aiming for a test of parity (1.00).

By Boris Schlossberg and Kathy Lien of BK Asset Management

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