The Dollar Sinks ahead of January’s Inflation Figures

Earlier in the Day:

Economic data released through the Asian session this morning included consumer sentiment figures out of Australia, Japan’s 1st estimate, 4^th quarter GDP and New Zealand inflation expectation numbers.

Australia’s Westpac Consumer sentiment index fell 2.3% in February, with the decline being attributed to the recent stock market volatility that has seen the ASX200 fall 3% in the current month, the index in the red year-to-date.

The greatest downward pressure from the index’s components came from the assessments of finances v a year ago, which fell by 4.5% and finances for the next 12-months that fell by 3.1%. The economic conditions index for the next 12-months fell by 4.7%. The time to buy a dwelling index was also down, falling by 2.7% to 103.8, below the long-run average 120, while still sitting above last year’s levels.

Near-term, the negative figures suggest that households will likely curb spending that could add further downward pressure on inflation and economic growth.

The Aussie Dollar moved from $0.78587 to $0.78568 upon release of the figures, before rising to $0.7881 at the time of writing, a gain of 0.28%.

Japan’s economy grew by 0.5% year-on-year in the 4^th quarter, falling short of a forecasted 0.9%, following a 3^rd quarter downwardly revised 2.2% growth. Quarter-on-quarter, the economy grew by just 0.1%, with growth slowing significantly from the 3^rd quarter’s 0.6%.

Household spending continues to pin back stronger economic growth, with soft wage growth being the missing piece of the jigsaw for Prime Minister Abe. Hopes remain that businesses will drive wage growth in the spring, but the 4^th quarter figures show just how precarious growth can be without support from domestic consumption, with rising imports having contributed to the softer numbers.

The Yen moved from ¥107.783 to ¥107.803 upon release of the figures, with the Japanese economy in expansion for the 8^th quarter-in-a-row, the longest run of growth since 1989. The stats ultimately had little impact on the Yen through the session, with the Yen surging 0.83% to ¥106.92, the first time at ¥106 levels since November 2016.

For the Kiwi Dollar, there was better news, with 2-year inflation expectations rising from 2.02% to 2.11%, according to the RBNZ’s latest survey.

The Kiwi Dollar moved from $0.7244 to $0.73029 upon release of the figures, the RBNZ likely to factor the latest survey results into its policy outlook. At the time of writing, the Kiwi Dollar rallied to $0.7326, an intraday gain of 0.71%.

While the data was mixed through the session, Dollar weakness through the session contributed to the sizeable gains across the majors.

In the equity markets, the stronger Yen slammed the Nikkei, which was down 1.13% at the time of writing, with the ASX200 down 0.25%, while the Hang Seng continued on its road to recovery, up 0.77%. There was less movement in the CSI300 ahead of Chinese New Year, with the CSI300 down just 0.06%, with much of the pre-CNY profit taking having already passed through.

The Day Ahead:

Following a quiet start to the week, the EUR comes into focus this morning, with 1^st estimate, 4^th quarter GDP numbers scheduled for release out of Germany and the Eurozone, this morning. The Eurozone’s December industrial production and Germany’s finalized January inflation figures also scheduled for release.

GDP numbers in line with or better than forecasts will be a positive for the EUR, with industrial production and finalized inflation figures unlikely to have a material impact on the EUR.

The EUR’s been on another tear this week, with the gains coming at the Dollar’s expense, with $1.24 levels on the cards should the U.S inflation figures fall short of market expectations this afternoon and GDP numbers impress.

At the time of writing, the EUR was up 0.27% to $1.2385, with direction through the day hinged on this afternoon’s U.S data, Eurozone’s stats likely to play second fiddle.

For the Pound, there are no material stats for the markets to focus on, following January inflation figures released on Tuesday, with focus returning to the Brexit story, as the British government looks to secure a friendly transition deal, while Theresa May battles the Tory rebels to align the party.

At the time of writing, the Pound was up 0.09% to $1.3907, the minor gains coming off the back of the Dollar sell-off this morning.

Across the Pond, it’s a big day for the Dollar, with January’s inflation and retail sales figures scheduled for release this afternoon.

Both the U.S Dollar and the global equity markets have been on a rollercoaster of a ride in recent weeks, with U.S 10-year Treasury yields having risen to above 2.9%. 10-year yields eased back to 2.83% this week, supporting the 3-day recovery in the U.S equity markets.

This afternoon’s inflation figures will cement market sentiment towards FED policy near-term, with any signs of the recent uptick in wage growth pushing up consumers’ prices likely to rock the equity markets and see the Dollar Spot Index bounce back to 90 and beyond.

At the time of writing, the Dollar Spot Index was down 0.32% to 89.417 and, while retail sales is expected to have an impact, the effect will certainly not be as significant as the inflation figures today. We’ve seen plenty of hype in the markets and, with forecasts suggesting that the market may have gotten ahead of itself, the Dollar could be in for a tough afternoon.