US Dollar: Gasoline Prices to Hit CPI, Not a Coincidence that US Postal Service Incre

  •      [B]US Dollar:  Gasoline Prices to Hit CPI, Not a  Coincidence that  [/B][B]US[/B][B] Postal Service Increased Stamp  Prices[/B]
  •      [B]Euro[/B][B] Range[/B][B] Tightens Ahead of GDP  Numbers[/B]
  •      [B]British Pound Tanks as Softer PPI  Suggests Weakness in CPI  [/B]

US Dollar: Gasoline Prices to Hit CPI, Not a Coincidence that US Postal Service Increased Stamp Prices

Speculators trading the US dollar will need to focus on two things this week; inflation and housing. Even though trading has been very quiet today, consumer prices are due for release tomorrow, which tends to be a big market mover. Last week, the Federal Reserve remained steadfastly hawkish so the CPI number will be particularly important to traders looking for confirmation on why the Fed refuses to put growth ahead of inflation. Producer prices surprised to the downside on Friday, but the impact of record gasoline prices should be most strongly felt in consumer and not producer prices. Since the beginning of the year, gasoline prices are up 48 percent and we believe that not only will consumers feel the pain at the gas station, but also in many ancillary services that rely of transportation as a method of delivery. In fact, today?s 2 cent increase in postal charges could very well be related to the higher gas prices. Therefore dollar bulls are holding out for the CPI number tomorrow, because a strong print would validate the Fed?s decision to remain focused on inflation. The biggest beneficiary should continue to be USD/JPY because of the currency pair?s clear carry advantage. Should CPI fail to meet up to the market?s expectations however, traders will seriously question what factors the Fed is looking at and because of that they will punish the US dollar. Aside from the CPI number, the Empire State manufacturing survey and the Treasury International Capital flow reports are also due for release. The weak dollar and the rally in the stock market suggest that both of these numbers should be more dollar friendly. As for the housing market, there has been a lot of talk about a Wall Street Journal article focusing on foreclosures. According to the report, at an auction of 100 foreclosed homes in the San Diego area, the average house or condo was sold for about 30 percent below the appraisal value and in some cases, the discounts were as much as 50 percent. This is further evidence that the housing market is in trouble. Our focus will turn to the housing market on Wednesday, when we look to the release of housing starts and building permits.

Euro Range Tightens Ahead of GDP Numbers

Even though the Euro has extended its Friday gains thanks to slightly stronger than expected industrial production numbers, the rally was modest at best. In fact, the EUR/USD has been confined to a 35 pip trading range for the past 24 hours. Tomorrow?s batch of US and Eurozone economic data should take the EUR/USD out of its range. From the Eurozone, we are expecting first quarter GDP. Growth is expected to slow from an annualized pace of 3.30 percent to 3.00 percent. Most of this deterioration is predicted to come from German growth. French growth is actually expected to accelerate, while German growth is forecasted to drop from 3.5 to 3.3 percent. These estimates may be a bit too pessimistic since we have only seen the strength of the Euro have a limited impact on Eurozone growth. European data should lead to some early activity, but the marquee events tomorrow are in the US, so any surprises there could negate the strength or weakness in the Eurozone. Meanwhile Swiss retail sales are due for release. Annualized consumer spending is expected to slow from 4.5 percent to 4.0 percent.

British Pound Tanks as Softer PPI Suggests Weakness in CPI

The British pound was one of the few currencies to actually lose value against the dollar today. Disappointments in producer prices, leading indicators and house prices provide partial explanation as to why the Bank of England failed to up their degree of hawkishness following last week?s 25bp rate hike. April input prices for producers fell 0.2 percent on an annualized basis and increased a less than expected 0.7 percent monthly. Even though annualized output prices were in line with expectations, core output price growth slowed from 2.8 to 2.3 percent. We indicated on Friday that the strength of the British pound should have reduced inflationary pressures and this was exactly what we saw today. Tomorrow, we have consumer prices due for release and we could see softer numbers there as well as consumers may benefit from lower prices on imported goods. Should we get softer numbers in CPI to go with this morning?s PPI release, rate hike expectations could drop sharply, which of course, would be bearish for the British pound. Aside from PPI, house prices also grew at a slower pace of 10.9 percent. This is a lagging indicator, but it does suggest that the UK housing market may be slowing.

Yen Traders Ignore Strong Data and Continue to Focus on US Stocks

The Japanese Yen crosses are up across the board as the Dow Jones Industrial Average hit yet another record high on an intraday basis. The persistent rally in the US stock markets coupled with the strong performance of the Asian markets overnight is keeping risk aversion high. This means that speculators are continuing to hold onto their yen funded stock trades. The relationship between the Dow and carry trades is so strong that traders have completely ignored the stronger Japanese data released overnight. The current account surplus hit a record high while the CGPI inflation index jumped from 2.0 percent to 2.2 percent year over year. This suggests that we could see a stronger GDP number and hawkish comments from BoJ Governor Fukui after the monetary policy meeting scheduled later this week.

Strong Spending in New Zealand Leads to Sharp Kiwi Gains

The Australian, New Zealand and Canadian dollars were all up strongly today with New Zealand retail sales being the story of the night. Consumer spending was originally expected to drop by 0.2 percent, but instead, it increased by 1.3 percent in March. This was the strongest rise since 1995. The low level of unemployment has cushioned any pain that the country may have felt from interest rates and this could lead to kiwi strength throughout the week. Australian data did not fare as well however with home loans and investment lending both falling short of expectations. There are no Australian or New Zealand data due for release tonight. Canada only has new motor vehicle sales and manufacturing shipments. The strength of the CAD today suggests that the market may be expecting stronger numbers.

By Kathy Lien, Chief Strategist of