Why the U.S. Dollar Can't be Saved by CPI Alone Why the U.S. Dollar Can't be Saved by CPI Alone | DZHI - DZH International 

Why the U.S. Dollar Can't be Saved by CPI Alone

  • Kathy Lien
  • 11 August 2017

Daily FX Market Roundup 08.10.17

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


The most important event risk for the U.S. dollar this week is Friday's inflation report but consumer prices alone won't be enough to save the dollar.  USD/JPY is falling because of geopolitical risks and less hawkish comments from Federal Reserve officials.  This morning FOMC voter Dudley joined the chorus of U.S. policymakers expressing concern about low inflation.  He said it is going to take some time for inflation to rise to 2% as the weaker dollar affects import prices.  He believes that year over year price measures will be depressed for a while and that the economy may be a bit more sluggish on the margin. He also felt that sluggish productivity could dampen wage growth despite job gains.  As one of the main drivers of Fed policy, Dudley's cautious views confirm that the central bank is in no rush to raise interest rates especially after this morning's producer price report.  Prices took an unexpected -0.1% dip in the month of July, causing the year over year rate to slow to 1.9% from 2% and jobless claims rose to 244K from 241K.  The drop in PPI signals potential weakness in CPI but even if consumer prices tick higher like economists anticipate, it won't be enough because the Fed doesn't feel good about inflation and more importantly, geopolitical tensions between the U.S. and North Korea continue to grow. So until the threat of war diffuses, USD/JPY could have a difficult time responding to positive data.  With that in mind, stronger CPI could send pairs like EUR/USD to 1.1700 as it exacerbates the pressure on high beta currencies that have been hit hard by risk aversion.  

The worst performing currency today was the New Zealand dollar which fell hard after Reserve Bank of New Zealand Governor Wheeler raised the possibility of currency intervention.What's interesting about his comment is that it was not made during his post monetary policy meeting press conference but rather during his testimony to Parliament.  As expected the RBNZ left interest rates unchanged at 1.75%. They expressed concerns about inflation and the possibility of a further decline in coming quarters.  During the press conference, Wheeler didn't say much. He expressed confidence that the economy will expand more than 3% over the coming years, said house price inflation could pick up after the election and a lower NZD would help.  But he used much stronger words during his testimony to Parliament, he said he would like to see a lower exchange rate, talked about how currency intervention is always an option and how they are always assessing the criteria.  Shortly after, Assistant Governor McDermott went one step further by confirming that the RBNZ changed NZD language to signal unease and this is the first step towards possible intervention.  So while NZD bounced off its lows during the NY session, it remains a sell on rallies against most major currencies regardless of how tonight's business PMI index fares.  The Canadian and Australian dollars also ended the day lower although their moves paled in comparison to NZD.  Canada's new housing price index slowed, oil prices unwound its earlier gains while consumer inflation expectations in Australia eased.    

The euro ended the day unchanged and its resilience continues to be a testament to the market's demand for the currency. Sterling rose above 1.3000 in the hours that followed the country's industrial production and trade balance reports.  Manufacturing activity rebounded 0.5% in the month of June, which was much stronger than the market's 0.1% forecast and that upside surprise completely overshadowed the lack of improvement in manufacturing production index and the trade balance. Yet by the end of the European trading session, sterling sank from its highs as the data failed to draw away from the sluggish growth in the economy and the uncertainties that lie ahead. 



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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.