This morning’s U.S. economic reports did little to alter existing trends in the foreign exchange market. The dollar extended its losses against the euro and British pound but continued to trade higher against the Japanese Yen and commodity currencies. The lack of consistency in the performance of the greenback this week has not changed, reflecting the impact of relative growth and divergent monetary policy direction on currency flows. Throughout the week, this divergence has widened, driving many currency pairs to multiyear highs as investors pile into European currencies and dump commodity currencies. With U.S. markets closed on Thursday and most North American traders out for the rest of the week, the volume in the FX market is expected to decline. As a result, there is very little reason to believe these trends to change.
Mixed U.S. data is part of the cause for the divergent performance in currencies. If this week’s economic reports were unambiguously positive, we may have seen a broad based rally in the greenback and sell-off in high beta currencies. If all data surprised to the downside, the dollar could have sold off universally, driving risk currencies higher. Unfortunately the unevenness of U.S. reports provides no clarity for the Federal Reserve and hence no directionality for currencies.
The continued decline in weekly jobless claims is a good sign for the labor market but it has been a long time since fewer layoffs translated into more hiring. Durable goods orders rose 2% in the month of October after rising an upwardly revised 4.1% the previous month. Unfortunately excluding transportation orders, durables declined 0.1%. Manufacturing activity in the Chicago region also declined with the PMI index dropping to 63 from 65.9. While this drop was smaller than expected, Chicago joins NY and Philadelphia in experiencing weaker growth.
With the upcoming holiday in the U.S., participation in the FX market is expected to decline but this does not always reduce the volatility in the overall market. There are still a number of Eurozone, Swiss and Canadian economic reports on the calendar that could drive outsized moves in the EUR and CAD. Risk appetite in general should remain supported by the potential easing of investment rules in China and the coalition deal in Germany.