The euro came under additional selling pressure this morning, dropping to a fresh 2 week low against the U.S. dollar. The move began in Europe when European traders ignored strong Eurozone confidence numbers and sold euros on month end rebalancing. With U.S. stocks falling in August, rebalancing flows is positive for the dollar and negative for the euro this month. The selling continued despite weaker than expected U.S. personal income and spending data, which should have been positive for the currency pair and exacerbated after the upward revision to the University of Michigan consumer confidence report.
This morning’s U.S. data highlight the ongoing challenges in the U.S. economy. Personal income and personal spending growth slowed in the month of July while the Chicago PMI index rose slightly to 53 from 52.3. These early Q3 PCE numbers point to the possibility of weaker consumption in the third quarter. It is early as this is only July data and we still need to see how August and September fares but based on other economic measures, we haven’t seen much evidence of additional momentum in the U.S. recovery. At the same time stable manufacturing conditions in the Chicago region may not be enough to offset the sharp decline in activity in the NY and Philadelphia regions. Prices paid and orders increased slightly but employment eased. Thankfully an upward revision in consumer confidence helped to round things out. The University of Michigan consumer confidence index was revised up to 82.1 from 80 for the month of August.
Up North, slower growth in Canada could prompt the Bank of Canada more cautious next week. The Canadian economy contracted by 0.5% in the June causing second quarter GDP growth to slow to 1.7% from 2.2% in Q1. Sluggish demand for exports, decline in business spending and slower growth in the U.S. are to blame but some of the weakness can also be attributed to temporary factors such as floods in Alberta and strikes in Quebec. When the BoC last met, Stephen Poloz led his first monetary policy meeting and immediately changed the central bank’s statement. Previously, it said a “modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target” but Poloz adjusted this language to say that “over time, as the normalization of these conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.” This was a move to provide forward guidance that would hopefully signal to the market they are in no rush to raise rates. Today’s Canadian GDP report should reinforce their desire to keep rates steady.