Dollar Finds Little Help From Heavy Concentration of Data

Tuesday’s US economic docket offered the dollar its most concentrated event risk for the week; yet the otherwise volatile data would deliver few surprises for a market that is already veraciously discounting future Fed rate decisions. The morning opened with a range of data that would cover both growth and inflation trends. With futures traders considering a quarter point rate hike in September a near certainty, there an obvious interesting in the produce price index for May. Upstream inflation pressures accelerated more quickly than expected to a 7.2 percent annualized pace that fell just short of the multi-decade high set just a few months back. Even when the 4.9 percent jump in energy costs and 0.8 percent increase in food prices were excluded, the core figure would notably match its own 16-year high. However, considering the market’s focus on the cost at the pump in the grocery line and the fact that the front-line CPI numbers were released last Friday, this data added little to the mix. For growth, the session’s data was not encouraging for the greenback. The housing market – the US economy’s anchor – reported an ongoing drop in construction. Housing starts slipped 3.3 percent to a 17-year low and permits for future projects fell 1.3 percent as demand sufferers from evaporating home values, ballooning inventories, rising mortgage rates and plunging consumer confidence. The business community was similarly under pressure with industrial production contracting 0.2 percent and capacity utilization edging down to a new three-and-a-half year low. To top it off, trade activity was lending little help to expansion despite the dollar’s recent record lows. The current account deficit for the first quarter ballooned more than expected to a $172.5 billion shortfall owing largely to rising fuel costs burdening the physical balance and reduced foreign investment curbing net income.

Euro Rides Out Rising Pessimism On Rate Hopes

Fundamentals were in play for the euro this morning, yet traders would ultimately pay little head to the session’s economic road bumps. Among a few top tier economic releases, the ZEW investor sentiment surveys for the Euro Zone and Germany would represent top event risk. The aggregate confidence reading slipped dropped sharply for a -52.7 reading – reflecting the worst level of confidence among European investors since records began back in 1999. Tending to draw more interest, the German equivalent printed its own plunge. The Euro Zone’s largest economy found a net 57 percent of investors and analysts expected German growth to contract further within the next six months. This was the most pessimistic outlook for activity in over 15 years. At the same time, this indicator has been pushing similar record lows rather consistently over the past few months, and the recent jump in speculation for a July rate hike from the ECB certainly adds to the already existing concerns surrounding consumer spending and rising oil prices. Elsewhere, Euro Zone trade faired well despite the euro’s highs. A 6.2 percent jump in exports led to an unexpected 2.3 billion surplus in April - the best reading in six months.

Pound Unexpectedly Drops On BoE Forecasts Of 4 Percent Inflation

Under normal circumstances, high inflation readings and expectations are a guaranteed currency booster. This was the thinking going into today’s UK CPI numbers. The consumer basket reported a 0.6 percent rise in headline inflation through the month of May that boosted the annualized figure to a decade high 3.3 percent clip. Though, considering the core annualized number ticked higher to a 1.5 percent pace, it was clear that most of the pressure was found in volatile components like food and energy. Nonetheless, with headline inflation at a decade high and above the 3.0 percent tolerance limit; BoE Governor Mervyn King, for the second time since the central bank was made independent in 1997, had to write a letter to the Chancellor of the Exchequer detailing why inflation was so high and what would be done to curb it. Forecasts for price growth to top 4.0 percent in the second half and remaining above target into 2009 suggested action was necessitated. However, this was immediately cut short by comments that “the path of the bank rate that will be necessary to meet the 2 percent target is uncertain” and “the committee will maintain price stability by ensuring that the rise in inflation is temporary.” Without action on the BoE’s part, inflation at these levels is merely a burden on growth - and therefore the pound - going forward.

Commodity Dollars: Little Chance Of An RBA Hike This Year

Commodity currencies appreciated against the USD, with the Canadian dollar, earning the biggest gains. Today’s market moving economic release was the RBA minutes, which indicated that central bank Governor, Glenn Stevens, was content with the current monetary policy, and that the slowdown in the economy was needed. In addition, the tone set by the minutes indicated that a rate cut would be highly unlikely, with speculation that the RBA would wait 12 months to assess the data before changing their monetary policy. Canada released their International Securities Transactions figure hit a 17-month high owing to steady confidence in the Canadian economy. Looking ahead, Australia’s Westpac Leading Index figures are expected to decline; while the Canadian equivalent is expected to pass the month unchanged as consumer spending and trade hold out. These low level indicators may encourage gains against an otherwise quiet dollar.

Yen Traders Look To BoJ Minutes For Forecasts On Growth, Inflation

On the back of strong economic data, the yen managed to recover some lost ground against its US counterpart, with the USDJPY pair trading back below 108.00 today. Tertiary Industry Index and Machine Tool Order figures both pointed to expansion; though the outlook for fading growth going forward seems to be little changed considering the path of consumer spending and trade activity. Looking ahead, Store sales and Coincident Index figures provide low-level economic event risk for fundamental traders to work with. In addition, the BoJ minutes may give a reading on the policy group’s outlook for inflation and growth in the months ahead.

Kathy Lien is the Chief Currency Strategist at FXCM.