The Canadian dollar has experienced an abrupt weakening in early morning trading on Friday. After the release of Canada's April employment data Friday morning, the loonie initially achieved and maintained modest gains, but they only proved temporary. The Canadian dollar's gains were quickly eroded following the news of the U.S. April retail sales: they rose 0.8 per cent, versus the expected increase of only 0.1 per cent!
The positive retail sales report has increased uncertainty in the market because the news contradicted the view of a weakening U.S. economy, and called into question the need for further aggressive eases by the Federal Reserve. That is to say, will the Federal Reserve cut rates on May 15? If so, by how much: 25 or 50 bps?
Prior to the release of Friday's U.S. data, the loonie was benefiting on the assumptions that Canada's 50 bps interest rate premium over the U.S. would widen. But as mentioned, there is much speculation as to whether the gap will widen because the Fed may not deem it necessary to take aggressive action at their next meeting. This possible scenario diminishes the idea of a stronger Canadian dollar based on a wider interest rate differential between the two countries.
The euro is on shaky ground on Friday morning. After the ECB blindsided the market with its surprise rate cut on Thursday, losing credibility, it was the ECB that was then surprised. Traders began unloading their euros, thus dragging the currency lower.
The central bank stated that the reason for the rate cut was to address the upward distortions in the money supply (above the bank's reference rate) that was inflated by non-euro area resident's purchases of euro area mutual funds, shares, and other marketable securities. It is suggested that the timing and the explanation of the ECB move could hinder the euro even further.
The Japanese yen has improved slightly in quiet trading, however poor economic data continues to highlight the weakness in the country's growth. Any support to the yen that Finance Minister Shiokawa may have created by his close monitoring of the dollar/yen rate has been offset by Prime Minister Koizumi's questionable ability to implement the economic reforms he has promised.
After realizing gains on the heels of Bank of England's rate cut yesterday, the sterling is lower today after being undermined by the weakness in the euro. Although lower rates should support growth in the pound, the overall interest in holding U.S. dollars is preventing the pound from gaining any headway.
The Australian dollar is relatively unchanged on Friday morning.
The currency update is provided by Custom House Corporate Foreign Exchange Services. More information is available by calling 1-800-242-3147. Custom House maintains branches in cities from coast-to-coast.
