NEWS / Foreign Exchange

US Growth Slows but not the Consumer, Loonie Soars on GDP

US growth slowed to its lowest rate in 4 years but personal consumption rose to its highest level in a year.

Q1 GDP growth was revised to 0.6% from initial estimates of 1.3%, reaching the lowest rate since Q4 2002. The bigger than expected revision was a result of a larger than expected drag from trade (higher rise in imports and lower rise in exports) as well as falling inventories.

But the US consumer continues to provide the silver lining for of today??™s disappointing GDP report. The personal consumption expenditure component was revised to 4.4% from the initial 3.8%, reaching its highest level since Q1 2006. The figures suggest the US consumer will be instrumental in preventing a hard landing in US growth, and may even help stave off a rate cut this year. The latest figures on consumer spending are due tomorrow, with April personal spending expected to have risen to 0.4% from 0.3%, thereby helping to stave off fears from deteriorating housing.

The question to ask going forward is the impact of a correction in US stocks on personal consumption. In the event that US housing takes a turn to the worst (as maybe indicated in falling building permits and existing home sales), the added impact of falling equities on personal consumption can place a heavy burden on aggregate demand. The role of the US consumer is increasingly paramount considering the retrenching in capital expenditures.

The 4K decline in jobless claims to 310k defied expectations of a 4K rise, shedding fresh evidence of improvements in the labor sector as far as unemployment insurance. The stability in jobless claims has been running counter to deterioration in the establishment survey of the Labor Department, showing broad declines in payrolls. Yesterday??™s release from the ADP estimate on private payrolls slowed to 97K in April from a revised 61K in March, undershooting forecasts of 115-120K. The ADP report suggests that the April non-farm payrolls may come in weaker than the consensus forecasts of 140K after 88K in March. The ADP forecast of private payrolls has proven to have an increasingly effective track record in predicting the direction of non-farm payrolls.

The bigger than expected increase in May Chicago PMI to 61.7 from April??™s 52.9 and the jump in the employment index to 57.3 from 50.5 is another key support for the dollar. The new orders component jumped to 71.1 from 56.5, while the prices paid index also soared, coming in at 70.2 from 64.9.

The 0.1% rise in April construction spending and the upward revision to 0.6% from 0.2% is also helping to maintain stability in the greenback.

The stronger than expected rise in Canada ??™s Q1 GDP to 3.7% annualized from 1.5% further support our bullish stance on the loonie, particularly against GBP and AUD. Caution against fresh bearish positions in USDCAD ahead of Friday??™s US payrolls, which may deliver an upside surprise.

GBPCAD breaks the key 61.8% retracement support at 2.1140 eyeing medium term target at 2.09.

FX Implications

Today??™s data will serve as a stabilize to the US dollar rather than a booster to it, with tomorrow??™s reports playing the bigger role in determining the fate of the underlying short positions in the greenback. The dollar could come under a new wave of selling in the event that payrolls fail to surpass the 110-120K territory and core PCE price index remains under 2.1%. A rise in the unemployment rate to 4.6% would also be considered as a major factor in sustaining expectations for a Fed easing. The dollar should obtain a major end-of-week boost in case payrolls come in more than 110K and the unemployment rate shows no increase. Any increase in the core PCE price index from 2.1% would be dollar positive in the event that payrolls come in above 110K. The manufacturing ISM due at 10 am EST will be essential in determining the overall comeback in manufacturing.

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