Intraday Market Thoughts

A Hidden Sign for US Dollar?

by Adam Button
May 15, 2015 0:23

Most headlines focused on a soft PPI inflation report for the US on Thursday but a hidden data point may have sent a different signal. The euro was the top performer on the day while the Australian dollar lagged. Comments from Kuroda are due later. There are 5 Premium trades currently in progress, including EURUSD, GBPUSD and NZD. Full trades and charts are found here.

The Fed is steadfast that good growth and inflation will return to the US but PPI didn't show any price pressure in the pipeline. Ex-food and energy, it rose just 0.8% compared to 1.1% y/y expected. That was contrasted by a third consecutive upbeat initial jobless claims report at 264K compared to 273K expected.

But looking ahead, one statistic was buried in the headlines and shows the Fed may eventually be proven right. Business investment has been dismal for the past 8 months and once again disappointed in March data. The best proxy for the metric is durable goods orders non-defense ex-air and the initial report showed it down 0.8% in the month compared to +1.0% expected.

A week later it was revised to -0.1% in the factory orders report. On Thursday, it was revised again – this time to +0.6%. February orders were earlier revised to +2.8% from +1.7% as well so what had looked like an extremely disappointing period was actually strong.

It's especially important because it's one of the best forward-looking indicators. It's still too soon to fall back in love with the US dollar but if a few US indicators begin to beat expectations, the market may quickly realize that a September rate hike is possible.

In the shorter term, however, the focus remains on the euro and Bunds. Yields were lower and that stalled a rally to a 2.5 month high of 1.1445 in EUR/USD but even after a hiccup down to 1.1350, buyers returned to push the pair to a close above 1.14. It's another sign that long-term shorts are looking for the exits.

Looking ahead, the yen was quiet in US trading but that could change with Kuroda on the docket at 0340 GMT. He recently hinted at the BOJ missing its inflation target but was steadfast that it didn't require a change in policy. Japanese PPI is also due at 2350 GMT.


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