Weekly economic data such as jobless claims tends to only have a small impact on the U.S. dollar except when there is a big surprise. This weekâ€™s report shocked everyone from Wall Street to Canary Wharf because jobless claims fell to its lowest level in 4.5 years. Since economists were looking for claims to rise to 370k the drop from 369k down to 339k was just astonishing. With over 3 weeks to go before the elections, President Obamaâ€™s bid to secure his seat for a second term is looking a lot stronger. Normally we would take this improvement with a grain of salt because weekly jobless claims can be very volatile but after last Fridayâ€™s decline in the unemployment rate, we canâ€™t help but wonder if the labor market is gaining some real momentum. Yet millions of Americans are still unemployed and for the time being, weâ€™ll consider this improvement in claims an outlier until it is confirmed by an equally low print next week. Based on the price action of the U.S. dollar, it is clear that other investors share our skepticism because they realize that at the end of the day, one week of lower jobless claims wonâ€™t be enough to change the Federal Reserveâ€™s plans to keep monetary policy extremely accommodative. While the Fed will breathe easier with todayâ€™s jobless claims report, they canâ€™t get too excited about one week of improvement which explains why USD/JPY rose 20 pips off the news and not 80. Continuing claims also dropped to a 5 month low of 3.273 million from 3.288 million.
U.S. and Canadian trade numbers were lost in the excitement of jobless claims. The U.S. trade deficit widened in the month of August to -$44.2B from -$42.5B after exports dropped 1% to their lowest level since February. Weaker demand from Europe, China and other emerging markets is taking a big toll on manufacturing activity and based on the 0.1% decline in imports, U.S. demand isnâ€™t all that strong either. Canada on the other hand reported a narrower trade deficit. International Merchandise Trade shrank to -1.32B from -2.53B. This improvement was not a major surprise considering that Canadaâ€™s trade deficit hit a record high the previous month. The details were a bit discouraging with exports falling 0.1% and imports dropping 3.1%. Whenever there is an improvement in trade activity, we want to see a rise in exports and not a decline. Nonetheless the CAD appreciated against the USD on the back of these trade numbers and stronger jobless claims.
Meanwhile the EUR/USD managed to recover from S&Pâ€™s downgrade of Spain last night. S&P was behind the curve and now has put themselves on par with Moodyâ€™s. Fitch currently rates Spain one notch higher than S&P and Moodyâ€™s, so they could be the next ones to issue a downgrade. However the focus is still on Moodyâ€™s who decision on pushing Spain to junk is due at the end of the month. Spanish bond yields have ticked up as the pressure for Spain to accept a bailout grows.