Dollar Continues To Run, As Core CPI Surprises
Jeremy Cook | Feb 27, 2015 04:18AM ET
Headline inflation in the United States dipped into deflationary territory for the first time since 2009 yesterday but the USD was buoyed strongly by other measures of price performance.
Once oil and food prices had been removed from the inflationary basket however, prices rose by 0.2% on the month and 1.6% on the year. Following Fed Chair Janet Yellen’s assertions earlier in the week that any near-term falls in the rate of inflation was down to oil prices and was likely to prove transitory, any move higher in inflation – given the negative and falling numbers we are seeing elsewhere – is a major fillip for those looking for a rate increase from the Federal Reserve this year.
USD ran higher in the aftermath taking EUR/USD into the 1.11s and GBP/USD into the 1.53s, albeit briefly. Some of the very strong positioning in the USD that characterised January’s trade leaked out over the course of the past month but was rebuilt yesterday. USD has a lot further to run in my opinion, especially against the euro. While one currency is enjoying an atmosphere of possible rate increases and a strengthening economic recovery, the other is beset by negative interest rates and is waiting on a large QE plan of which we will learn more next week.
That European weakness helped bring GBP/EUR higher through the session as well and is currently trading at the highest level since Boxing Day 2007.
Yesterday’s UK GDP number was roughly as expected, with growth increasing by 0.5% on the quarter, matching the original release. There was little reaction to the news in markets but recent export data – increasing by over 4% on the year – is encouraging, especially given the lack of demand that we are seeing in the eurozone. We will have to wait for the next trade balance announcements to see where these exports are going.
The stronger USD has moved the Chinese yuan to its lowest level in more than two years overnight. China’s central bank is more than prepared to loosen policy and weaken its currency in light of its rather poor economic performance at the moment. Obviously, overly aggressive actions could see a run on the managed yuan in the form of outflows and any weakness in the yuan will only increase the amount of money that Chinese companies have to repay in the form of debt coupons. USD/CNY is just below 6.2700 this morning.
The economic picture in Japan remains one of strong export driven growth offset by a poor domestic demand picture. While industrial production is a juicy 4% higher, retail sales fell by 1.3% on the month and, all importantly for the Bank of Japan, inflation slipped by 0.2%. While the current Abenomics plan seems to be successfully boosting exports, the lack of domestic activity is concerning. Wage negotiations are set to begin later in the quarter and could be enough to bring about a reversal in fortunes, although Japanese corporates seem reticent to play along at the moment.
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Today’s markets are once again about inflation, this time from the eurozone. German and Italian measures are due throughout the morning – the eurozone - wide number is due Monday. Both are expected to show deflation once again, although Germany is expecting a 0.6% rise on the month. This afternoon will be dominated by the US GDP report at 13.30.
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