Inflation and the Dollar in the Spotlight

Earlier in the Day:

Economic data released through the Asian session in the early hours of this morning included building consents out of New Zealand and China’s December trade figures.

For the Kiwi Dollar, it’s been an impressive run of late and November’s 10.8% surge in building consents reversed the 10.4% slump in October, easing immediate concerns over the housing sector, with the Kiwi Dollar rising from $0.7256 to $0.72605 upon release of the figures.

At the time of writing, the Kiwi Dollar was down 0.12% to $0.7252 however, with commodity currencies on the decline following the trade figures out of China this morning.

China’s trade surplus jumped in Dollar terms from $40.21bn to $54.69bn in December, with exports rising by 10.9%, following on from November’s 12.3%, which came ahead of a forecasted 9.1% increase. On the downside for the commodity currencies was the 4.5% increase in imports, which fell well short of a forecasted 13% rise and November’s 17.7% surge.

There was very little immediate response to the stats, with the Aussie Dollar barely moving on release of the figures, whilst under the cosh in the mid-part of the Asian session.

The Aussie Dollar was in the red at the time of writing, giving up intraday gains to fall 0.15% to $0.7880.

From a Chinese economy perspective, the trade figures will certainly be a positive, but the lack of demand for foreign goods and services will be a concern, which ultimately pinned back the Aussie and Kiwi Dollars.

In the equity markets, the major Asian indexes were in the green, with the Hang Seng and CSI300 up 0.28% and 0.20% respectively, Oil stocks leading the way, while the ASX200 and Nikkei were up by just 0.11% and 0.02% ahead of the close, with the markets responding to the overnight rallies in the U.S.

The risk on sentiment saw the Yen give up gains from earlier in the day, with the Yen down 0.01% to ¥111.27 at the time of writing, easing back from an intraday high ¥111.06.

The Day Ahead:

Following Thursday’s rally off the back of a more hawkish than expected ECB minutes, the EUR is unlikely to be influenced by macroeconomic data this morning, with finalized December inflation figures out of France and Spain unlikely to draw too much attention ahead of some rather important stats out of the U.S.

Of interest to the markets will be the outcome of Chancellor Merkel’s final day of coalition talks with the Social Democratic Party. Any hint of the Chancellor having to go back to the polls could spell the end of Merkel’s political career and the EUR would certainly respond to such an outcome.

News on progress has been lacking and, while Merkel has continued to be optimistic, the possibility of a market shock remains, with there being no preferred alternative candidate from the market’s perspective.

At the time of writing, the EUR was up 0.16% to $1.2051, with updates on overnight talks the key driver for the EUR today.

For the Pound, there are no material stats to consider, which will leave the markets focused on Brexit chatter, though with Chancellor Merkel’s political career on the line, EU chatter may be on the lighter side, with the talk of a 2^nd EU Referendum still doing its rounds in the British media.

At the time of writing, the Pound was up 0.07% to $1.3547, with the recovery to $1.35 levels coming off the back of the particularly soft wholesale inflation figures out of the U.S on Thursday.

Across the Pond, it’s a big day for the Dollar, with U.S retail sales and certainly the more important December inflation figures scheduled for release.

It’s been a choppy start to the year for the Dollar and the jump in yields earlier in the week off the back of the ‘fake news’ on China’s shift in policy towards U.S Treasuries has reversed, with the markets less than convinced that the FED will be able to deliver 3 rate hikes this year.

At the time of writing, the Dollar Spot Index was down 0.03% to 91.824, with some relatively hawkish commentary from FOMC voting member Dudley doing little to prop up the Dollar ahead of this afternoon’s stats. The emphasis has certainly shifted away from labour market data, from a Dollar perspective, to inflation which is now the final piece of the puzzle from the FED’s perspective. Today’s figures will certainly set the tone for the quarter and could see the markets cut its forecasts on the number of rate hikes to a single move for the year, should the numbers disappoint.