Will US CPI Send the Dollar Lower?

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Market Drivers October 18, 2016
UK CPI mixed but boosts cable
Dollar weaker across the board
Nikkei 0.38% Dax 1.09%
Oil $50/bbl
Gold $1263/oz.

Europe and Asia:
NZD CPI 0.2% vs. 0.0%
CNY New Loans 12B vs 10B
GBP UK CPI 1.0% vs. 0.9%
GBO UK PPI 0.0% vs. 0.4%

North America:
USD CPI 8:30
CAD Manufacturing Sales 8:30

The dollar was lower across the board in Asian and early European trade today with commodity dollars especially strong against the greenback as kiwi approached the .7200 figure while Aussie moved towards .7700.

Both of the antipodeans were boosted by better economic data. In New Zealand the CPI printed much hotter than expected at 0.2% versus 0.0% suggesting that the RBNZ will only cut rates one more time before stopping this easing cycle. Today the market will also get the results of the Dairy Auction during North American trade and another positive result could push the kiwi above the .7200 figure as the day progresses.

Meanwhile the Aussie was also well bid rising to .7690 on the back of relatively hawkish RBA minutes which indicated that the central bank will remain stationary for the time being. Governor Lowe noted that inflation data will be key to further policy assessment but that for now the economy was performing reasonably well and that rates were already very low.

In UK the inflation data was mixed with CPI slightly hotter at 1.0% versus 0.9% while PPI was much cooler at 0.0% versus 0.4% forecast. So far, low sterling exchange rate is not having a material impact on UK inflation, but it is too soon to tell. If cable remains below the 1.2500 mark until the end of the year, inflationary pressure are sure to rise which could complicate matters for BoE as tries to maintain an accommodative policy in light of the Brexit vote.

Cable rose ahead of the news trading to a high of 1.2280, but came off the highs in the wake of weaker PPI numbers. Still it appears that the pair has carved out a bottom at the 1.2100 level although it remains extremely volatile as traders try to anticipate the next move in the Brexit drama. The focus now will turn to the judiciary where the Brexit referendum faces a call for Parliamentary approval. If the plaintiffs demands were to be granted, cable would see a massive rally on the assumption that Parliament would deny the Brexit vote. However most experts believe such an outcome is remote and cable remains under pressure for now.

In North America today the market will get a look at US CPI data with consensus anticipating a rise to 0.3% from 0.2% the month prior. Anything in line could provide a small boost to the dollar especially if it pushes 10 year yields above the 1.80% mark. However, if the CPI data misses the dollar pullback may become more substantial. Inflation is not really a factor in Fed decision making now – labor data is – but any seed of doubt about the rate hike path in December could exacerbate the dollar selloff as the day proceeds.

Boris Schlossberg
Managing Director

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