Talking Points
Japan on holiday
EZ Inflation in line IP shows continued strength
Safe have flows dominate to the USD
US IP and Empire on tap
With Japan on holiday at the start of the week, Asian session trading started off slowly. But as news out of the Middle East became increasingly grim the dollar gained strength benefiting from continued flight to safety flows. In an ever more uncertain geo-political climate, traders flocked to the comfort and liquidity of the currency from the sole remaining superpower in the world.
Over the week-end Israel continued to pound Hezbollah positions in southern Lebanon while Hezbollah retaliated with missile attacks on Israels third largest city Haifa. Israel also accused Iran of contributing both troops and materiel to the conflict which if proven true could lead to an escalation of hostilities. In short, the geo-political tensions in the Middle East expanded rather than receded over the week-end and should either Iran or Syria decide to confront Israel directly currency market participants will likely further increase their appetite for dollars in the coming days.
Although presently the FX markets are trading strictly off front page rather than business page news, US economic data released last Friday was hardly encouraging for dollar bulls. With both Retail Sales and U of M survey data printing below expectations, the latest economic reports suggest that the US consumption is slowing markedly. The FX market is almost universally convinced that the Fed will raise rates at the August FOMC meeting, but if the PPI and CPI data coming out in the next two days show that core inflation remains in check, the Fed, given the ferocity of the fighting in the Middle East and its potential depressing effect on Us consumption going forward may surprise the market and choose to stand down at the August 8th meeting. Granted at present the possibility of such an outcome is slight at best, but fast moving political developments can often produce rapid and unexpected changes in economic policy from monetary officials. With August 8th a full three weeks away, all scenarios should be considered especially if the fighting in Middle East expands to other locales.
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