While most of the major currencies appear to be starting the North American trading session unchanged against the U.S. dollar, there has been quite a bit of volatility on an intraday basis. EUR/USD and GBP/USD rose strongly in early European trading on the heels of a solid Spanish bond auction and healthy U.K. consumer spending numbers but the gains have faded since then. The same price action can be seen in other currency pairs like the AUD/USD but USD/JPY managed to rise to its highest level in nearly 2 months and hold onto its gains despite weaker U.S. data. There has been very little negative news flow to explain the reversal in risk but the intraday sell-off coincided with the drop in Dow futures.

The first round of U.S. data was extremely disappointing, but the dollar is unfazed. Jobless claims rose to 388k this week from 342k. While a snapback was expected after the quarterly reporting distortions last week, few people expected claims to rise to its highest level in 3 months. The increase in claims suggests that the labor market may not be performing nearly as well as the drop in the unemployment rate suggests – a worry that have been at the front of the minds of the Federal Reserve, economists and many investors. Leading indicators and the Philadelphia Fed survey will be released later this morning and while we anticipate slightly better readings for both, we don’t expect the data to have much impact on risk appetite.

Meanwhile crisis was averted with slightly better than expected Chinese economic data last night. China experienced its weakest GDP growth in more than decade but at 7.4%, the pace was right in line with expectations. On a quarterly basis, GDP growth was stronger than anticipated rising 2.2% and industrial production along with retail sales also beat expectations. These reports show that there is no hard landing for China right now and with a small amount of fiscal or monetary stimulus, it may even bottom. In Europe, Spanish bond yields and the EUR/USD have benefitting from another solid Spanish bond auction. Despite the risk of a Spanish bailout, investors continue to buy Spanish bonds. The 2 day EU Leaders Summit that is currently underway will most likely be a disappointment with no announcements being made.

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