Dollar Snaps Back On U.S. Optimism

The U.S. dollar is trading higher against all of the major currencies this morning but the bulk the action was in Asia. Better-than-expected U.S. trade numbers barely left a dent on the FX market because the trade deficit still increased. The U.S. trade balance dropped to -$40.3B from -$37.1B in the month of April. Despite the wider deficit, exports and imports both ticked higher, which is good news because it reflects stronger external and internal demand. In fact even with the recent rise in the U.S. dollar, exports hit its second highest level ever. The more interesting event risks today will be the speeches by FOMC voters Raskin and George. These two Fed Presidents are on the opposite sides of the spectrum with Raskin being a dove and George a hawk so therefore it will be interesting to see if they both agree that asset purchases should be tapered this year. If they do, we could see renewed gains in the greenback that could help USD/JPY extend its recovery above 100.

Canadian Conditions
Up North, Canada also reported weaker trade conditions. The country's deficit rose from C$3 million in March to C$567 million in April. Imports surged to a record high on stronger energy demand while exports experienced its first decline in 5 months. USD/CAD held onto its gains but like U.S. data, Canadian trade numbers had very little impact on the loonie.

Instead, the moves in the FX market today are driven by a recovery in the U.S. dollar. The AUD and NZD are down about 1%. The greenback experienced a steep slide yesterday after disappointing U.S. ISM numbers but stocks did not collapse and this resilience left investors with the hope that the rest of this week's data including non-manufacturing ISM, Beige Book report and non-farm payrolls could still show strength in the U.S. economy.

Japan's Bond Auction
Meanwhile it is worth noting that despite the rebound in Japanese stocks, a weak bond auction caused JGB yields to jump overnight. The Bank of Japan is watching the volatility in the equity and bond markets very carefully and if these moves do not settle soon, they could increase the frequency of bonds purchased later this month.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.