Month-end rebalancing seems responsible for today’s EURUSD losses, although US economic data was less than stellar and highlighted the ongoing doubts about the strength of the US recovery.

The euro (EUR) came under additional selling pressure this morning, dropping to a fresh two-week low against the US dollar (USD). The move began in Europe when European traders ignored strong Eurozone confidence numbers and sold the shared currency on month-end rebalancing.

With US stocks falling in August, rebalancing flows are positive for the dollar and negative for the euro. The selling continued despite weaker-than-expected US personal income and spending data, which should have been positive for EURUSD, and it only exacerbated after the upward revision to the University of Michigan consumer confidence report.

This morning's US data highlight the ongoing challenges in the US economy. Personal income and personal spending growth slowed in July, while the Chicago PMI index rose slightly to 53 from 52.3. These early Q3 PCE numbers point to the possibility of weaker consumption in the third quarter. Although it’s still early in Q3 and we still need to see how August and September fares, based on other economic measures, we haven't seen much evidence of additional momentum in the US recovery.

At the same time, stable manufacturing conditions in the Chicago region may not be enough to offset the sharp declines in the NY and Philadelphia regions. Prices and orders increased slightly, but employment eased. Thankfully, an upward revision in consumer confidence helped to round things out. The University of Michigan consumer confidence index was revised up to 82.1 from 80 in the month of August.

5 Factors Slowing Canada’s Economy

North of the border, slower economic growth could prompt the Bank of Canada (BoC) to be more cautious next week. The Canadian economy contracted by 0.5% in June, causing second-quarter GDP growth to slow to 1.7% from 2.2% in Q1. Sluggish demand for exports, a decline in business spending, and slower growth in the US are to blame, but some of the weakness can also be attributed to temporary factors such as floods in Alberta and a labor strike in Quebec.

When the BoC last met, central bank Governor Stephen Poloz led his first monetary policy meeting and immediately changed the central bank's statement. Previously, it said a "modest withdrawal will likely be required, consistent with achieving the 2% inflation target," but Poloz adjusted this language to say that "over time, as the normalization of these conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target." This was a move to provide forward guidance that would hopefully signal to the market the Bank is in no rush to raise rates. Today's Canadian GDP report should only reinforce the desire to keep rates steady.

By Kathy Lien of BK Asset