The U.S. dollar and Japanese Yen are the best performing currencies this morning as disappointing economic data from the U.S., Europe and China raised fresh concerns about the global recovery. U.S. new home sales increased 1.5% in the month of March but any optimism stemming from the stronger increase last month was offset by a big downward revision the prior month. New home sales dropped 7.6% in February compared to an initial estimate of only a 4.6% decline. Manufacturing conditions in the Richmond region also contracted in the month of April and yet weaker economic data has not stopped USD/JPY from taking another stab at 100. With U.S. stocks up nearly a percent this morning, the currency pair is near its highs for the day and if equities extend their gains, USD/JPY could attempt to test this level again. However in order for USD/JPY to break 100, U.S. yields needs to resume their rise.

What we find interesting about the overnight price action is that EUR/USD has broken below 1.30 and yet European stocks are trading very well despite the decline in German service and manufacturing activity – the DAX is up 1.8% and the CAC is up more than 2.5%. This divergence is a clear reflection of the market’s expectations for ECB easing, as a rate cut by the central bank would be negative for the currency and positive for equities.

Investors certainly have reasons to be worried about global growth as weaker Chinese GDP numbers and now a contraction in German service and manufacturing activity followed the slowdown in U.S. non-farm payrolls at the beginning of the month. The PMI numbers can be leading indicators for other economic reports and therefore the decline in Chinese and German economic activity could foreshadow further weakness ahead. If the German IFO report also shows a decline in business confidence, the EUR/USD could drop to 1.29 as odds of an ECB rate cut increase. The ECB meets next week and while we don’t expect the central bank to ease so quickly,

Up North, the Canadian dollar recovered from earlier losses after stronger than expected retail sales numbers. Consumer spending increased 0.8% in the month of February, more than double market expectations. While rising gas prices boosted spending, Canadian consumers also spent more on electronics, shoes, appliances and general merchandise. Sales excluding autos rose 0.7%. Bank of Canada Governor Carney was quick to say that that the weaker currency is providing a bit of stimulus to the economy. The better than expected data and optimistic comments from the BoC could set the CAD apart from other currencies.

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