Sunday, 18 October 2009

The US dollar remains

The US dollar remains mixed across the majors as the currency has broken lower against the Canadian dollar, but has generally held to well-defined ranges versus the euro and New Zealand dollar. When it comes to the US dollar index, it is clear that price remains in an uptrend, unless we see a drop below 84.00. The forex markets didn’t show much of a response to this morning’s release of the US consumer price index (CPI), despite the fact that the headline reading contracted for the first time since 1955 on an annualized basis. Indeed, CPI fell 0.1 percent in March, dragging the annualized rate down to -0.4 percent, as energy prices fell by 3 percent. However, excluding food and energy, core CPI actually rose 0.2 percent and the annualized rate held steady at 1.8 percent. All told, this should be somewhat comforting to the Federal Reserve, as the minutes from the Federal Open Market Committee’s (FOMC) last meeting showed that “a few” members were concerned about deflation risks. Ultimately, we will need to see the core CPI results reflect similar declines to the headline readings before it can be said that the US is in the midst of deflation. That said, there is still the risk looming that it a protracted period of contracting prices will occur in late 2009 or 2010. The truth of the matter is that demand, especially for discretionary goods, is likely to fall much further as the unemployment rate climbs. In fact, the unemployment rate hit a more than 25-year high of 8.5 percent in March, and with initial and continuing jobless claims showing no signs of abating, the rate could ultimately breach the upper range of the FOMC’s projections of 9.2 percent, and perhaps reach double-digits.Looking ahead to Thursday, US housing starts and building permits are projected to reflect a steep drop in demand during March, which would mark a major reversal after starts surged 22.2 percent and permits rose 3.0 percent in February. Meanwhile, initial jobless claims are forecasted to have risen to 660k during the week ending April 11

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