FX: Mixed CAD Data, Yields and Stocks Keeps Euro Pressured

Canadian retail sales were the only piece of North American data on the calendar today and according to the latest report, consumer spending in Canada rose 0.3% in May. Since economists were looking for a 0.5% rise, the magnitude of the increase was less than expected but the Canadian dollar held onto its gains because excluding autos, sales rose 0.5% against expectations for a 0.1% percent. When the Bank of Canada met earlier this month they were surprisingly hawkish in the face of weaker manufacturing activity, inflation and employment numbers. Yet their decision to hold onto the view that rates need to be increased is vindicated by the stronger than expected consumer spending numbers.

Across the Atlantic, the persistent rise in Spanish bond yields and decline in Spanish and Italian stocks prevented the EUR/USD from extending yesterday’s recovery. Ten year yields are closing in on 7.5%, a level that is not only unsustainable but screams for help from the EU. So far, there are no signs of movement in the European Union but as borrowing costs in the third and fourth largest economies in Europe continue to rise the urgency for an emergency summit and emergency solution increases. While everyone has their eyes on Spain because it’s the next likely domino to fall, yields in Italy are rising at a faster pace and moving closer to the 7% mark. According to a recent article from La Stampa, an Italian newspaper, ten major Italian cities are on the verge of collapse. After the bell yesterday, rating agency Moody’s put Germany, Netherlands and Luxembourg’s AAA rating on negative outlook. Weaker PMI numbers from Germany also did not help the EUR. While the Eurozone composite PMI index held steady at 46.4, the cracks are showing in Germany with manufacturing and service sector activity contracting at a faster pace in July.

Meanwhile, other currencies are performing much better than the euro. In fact, all of the major currencies with the exception of the euro are trading slightly higher against the U.S. dollar this morning. Better than expected Chinese manufacturing PMI numbers and optimistic comments from Reserve Bank of Australia Governor Stevens helped the lift the AUD and NZD. The U.S. Richmond Fed manufacturing index and House Price Index are scheduled for release at 10am ET but the more important U.S. events should be the earnings reports from big names such as Apple, AT&T, DuPont, Lockheed Martin and UPS.

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