Unconvincing Global Data Drives Investors Back Into U.S. Dollar

The U.S. dollar staged an end of week rally following unconvincing global data. On Thursday we had suggested that if upcoming economic reports reinforced the prospects of a stronger global recovery, money would flow out of U.S. dollars into those currencies. Unfortunately, the PMI reports from the Eurozone, UK and Australia were mixed, giving investors little confidence that their high beta currencies deserved to be trading at lofty levels. Investors could have sold U.S. dollars for a number of reasons, from lower Treasury yields to the rally in stocks and weaker existing home sales, but when they compared the consistent improvements in Markit Economics’ U.S. PMI reports with the unevenness of data abroad, the U.S. dollar became more attractive. At the same time, the sell-off in crypto currencies drove some investors into the safety of the greenback.

 

The Australian and New Zealand dollars were the worst performers. While Australia’s economy continues to recover, according to Markit Economics, service sector activity slowed in the month of May causing the composite index to fall to 58.1 from 58.9. This decline overshadowed the very strong increase in retail sales. Consumer spending rose 1.1% last month, more than double expectations. NZD followed AUD lower as investors shrugged on stronger credit card spending. The Reserve Bank of New Zealand meets next week and, while no changes to interest rates are expected, it has made it clear that “if required, we are prepared to tighten lending restrictions further” if house prices do not ease.

 

The Canadian dollar also sold off against the greenback, but its losses were modest thanks to the strong increase in April retail sales. Consumer spending grew 3.6% in the month of March, against forecast for 2.3% growth. Excluding autos the uptick was even more significant. With a large part of the country in lockdown, investors expected demand to soften significantly but that was not the case. The Canadian consumer has proved to be extraordinarily resilient, validating the Canadian dollar’s incredible strength. With more upside than downside surprises in data, the Bank of Canada is on track to lead the world in unwinding monetary stimulus.

 

The euro and sterling traded lower against the greenback. Although Eurozone PMIs all beat, reflecting stronger economic activity, regionally Germany experienced a slowdown in manufacturing activity that dragged the composite index below expectations. This disappointment put the euro on its back foot throughout the New York session. In the UK, service sector activity underperformed, but manufacturing activity was very strong, driving the overall UK PMI composite higher. Retail sales were also robust, with spending growing a whopping 9.2% last month, more than double the market’s 4.5% forecast. Friday’s reports reinforce our view that the Bank of England will be one of the next central banks in line to reduce stimulus.    

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