DailyFX

Dollar Waylaid by Risk Pressure, Yellen Commentary

John Kicklighter

Talking Points:

  • Dollar Waylaid by Risk Pressure, Yellen Commentary

  • Japanese Yen: A Tax Hike Adds Pressure to Economic, Inflation Outlook

  • Euro Unfazed by Further Drop In Inflation Measures

Dollar Waylaid by Risk Pressure, Yellen Commentary

The Dow Jones FXCM Dollar Index (ticker = USDollar) shows us everything we need to know about the dollar’s performance through the opening session. Despite an active trading day, the dollar ended relatively unchanged for the benchmark. Though its influence is curbed by a general lack of conviction, risk appetite trends continue to work against the safe haven. We have opened the week to a rise in equities, yen crosses and emerging markets to show a broad rise in speculative appetites – even if momentum comes up short. On the newswires, much was made of Fed Chairwoman Janet Yellen’s remarks that there is still considerable slack and growth and inflation. That is consistent with the FOMC’s lean and a steady Taper. Ahead we have manufacturing and consumer sentiment data, but ‘risk’ may prove more volatility inducing.

Japanese Yen: A Tax Hike Adds Pressure to Economic, Inflation Outlook

A wait-and-see approach to monetary policy is becoming an increasingly dangerous proposition. The opening 36 hours of this trading week have not been kind to Japan’s perceived economic and financial stability. On the data front, we met disappointing measures of business sector activity in the country’s March manufacturing PMI and the drop in the February industrial production statistics. The outlook was equally discouraging in quarterly Tankan surveys projecting a material softening. Outside the data front, the backdrop for growth and inflation had an expected pressure heaped on: an increase in the consumption tax from 5 to 8 percent. Despite all of this, market belief in a QE upgrade is still flat-lined.

Euro Unfazed by Further Drop In Inflation Measures

It doesn’t seem the impetus for the European Central Bank’s (ECB) last rate cut in November carries the same clout amongst Euro traders. This past session, the latest update to the Eurozone inflation statistics reported price pressures dropped to a 0.5 percent annual pace – the lowest pace of growth since October 2009 when it was still negative – while the core measure slumped to 0.8 percent. While these aren’t ‘deflationary’ levels, the risk is nevertheless palpable. Yet, what matters from a trading perspective is whether the central bank takes those concerns seriously. Over the past months, they have played down deflation risks; and it seems the market is acclimating. Though, if they ease on Thursday…

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