GDP Divergence Between G4 countries

Global equity markets rallied on Friday, as oil prices stabilized. Traders should not mistakenly think that the Libya situation is behind us. Libya shows no signs of quieting down, and it is likely that we will see additional fallout from the North-African conflict.

The Euro rallied in the morning, supported by mostly positive economic data. Private loans rose more than expected, and French consumer spending dropped less than feared.

US GDP data indicated that the economy is growing slower than hoped, clocking in at 2.8%, vs. analyst expectations of 3.3%. Nonetheless, the numbers are still quite healthy, particularly when compared to other G4 countries which are either contracting, or showing growth well below 1%. The dollar remained subdued on the data, but the tide turned when the University of Michigan Consumer Sentiment report was released. The figures showed a significant jump, climbing to 3-year highs, fueling a dollar rally against the Euro.

UK GDP figures released Friday showed a decline of .6%, and the index of services dropped .7%, twice the forecast. Unsurprisingly, the Pound was under pressure for most of the day. Nonetheless the losses were limited, as Pound traders are mostly focused on price data, as the Bank of England is expected to raise interest rates to battle inflation.

The yen continued its powerful advance, after a brief pullback during the Asian session. The yen has gained as investors run to the safety of US Treasuries. As a major holder of US debt, the yen benefits from the flight to safety.

The Swiss Franc took a breather, easing against the US dollar. Traders largely ignored the KOF Economic Barometer which gave a positive outlook for the Swiss nation. Although the Franc shows a strong correlation to gold, the late-day rally in gold was not tracked by the Franc.

The Canadian dollar quietly broke to new multi-year highs, as traders positioned themselves ahead of Monday’s GDP report. Analysts are looking for GDP growth of .3%. Although the CAD typically benefits from a rise in oil prices, last weeks spike in crude prices did not translate into sizable gains for the currency.

The coming week’s hefty economic calendar will provide plenty of opportunity. Monday’s pending home sales data will be a focal point for the dollar. Any indication of a recovery in the housing market might encourage the Fed to take a more hawkish approach to interest rates.

Libya remains in chaos, and no one knows where the next Mideast flareup will occur. News events are likely to play a pivotal role in shaping the currency movements of the current week.

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