Has Oil Already Hit The Pocketbooks Of Consumers?
US Dollar
The dollar extended its rally for the fourth consecutive
trading day thanks to a stronger producer price report. The latest producer
price index highlights the disparity between consumer and producer price growth.
Producer prices increased 1.0 percent compared to the market’s expectation for a
0.5 percent rise. Core producer prices, which excludes the more volatile food
and energy components also increased by a more than expected 0.4 percent
compared to the market’s expectation for 0.1 percent growth. Now that we have
received both the producer and consumer prices reports, we can see that in the
month of July, there was limited pass over of costs from the producer to the
consumer. This means that producers are bearing a good portion of the price
increase so either they too will have to hike prices soon or take a hit to
profits – neither of which is good for the US economy. Although we are pleased
to see that oil prices have retraced another two dollars today, it still hovers
above $60 a barrel. Although the high-end Hummer driving consumer has been able
to shrug off the higher price of oil as nothing more than a mere annoyance, the
average consumer will have a much more difficult time dealing with $3 a gallon
oil. There was a Wall Street Journal poll 2 days ago of 4000 plus people that
asked “How expensive would gas have to be for you to significantly cut the
amount you drive.” According to the poll 31 percent of people who responded said
that they have already cut driving activities, 21 percent said that they would
cut driving when oil reaches $3-$4 a gallon while another 18 percent said that
they wouldn’t cut driving until oil hit $4-$5 a gallon. So with 52 percent of
the sample population expected to drive significantly less, we think that it is
an educated guess to assume that a similar amount probably also have or plan on
cutting spending overall. Therefore unless oil continues to retrace back below
$60 a barrel, the future of consumer spending and the US dollar remains bleak.
Euro
The only piece of Eurozone data released today was the French
Trade balance. Although the deficit widened much less than the market forecasted
to EUR1.194bln from EUR1.149bln (market’s forecast was -EUR1.9bln), this is the
highest trade deficit that France has ever seen. Unsurprisingly, high oil prices
have increased the value of imports while exports took a sharp dive in the month
of June. Exports fell 2.8 percent in June following a 6.8 percent rise back in
May. The French government is worried that the country is gradually losing its
market share of world trade. Like Italy, France has been suffering from a lack
of competitiveness. After an exceptionally light economic calendar in the first
half of the week, tomorrow we are expecting German producer prices, Eurozone
consumer prices and Eurozone industrial production. We doubt that the Eurozone
will be able to escape the higher inflation that we have seen globally.
Industrial production is also expected to rise as a quiet confirmation of
improving conditions within the region.
British Pound
The minutes from the meeting at which the Bank of England cut
rates for the first time in 2 years disclosed that the decision was much tighter
than the market may have thought. The Monetary Policy Committee voted 5-4 to
lower rates with Governor King himself voting to keep rates on hold. With the
strong inflation data that we saw yesterday and a hawkish Quarterly Inflation
report, we see even more evidence that the central bank may remain on hold for
the remainder of the year. The inflation rate is above the central bank’s 2
percent target, which means that they will naturally be concerned about curbing
inflation. Meanwhile the labor market report was also encouraging and confirms
that things are not as bad as the market may have thought. Unemployment claims
increased 2,800 versus a consensus forecast for an increase of 8,800. Claims
were also revised down for the month of June while the ILO measure for the
unemployment rate for the month of June fell to 4.7 percent from 4.8 percent.
Japanese Yen
The Japanese Yen continues to give back its gains on an empty
economic calendar. There is nothing new to report on the USDJPY front. The broad
dollar rally is helping to drive the currency pair higher. We would certainly
not be surprised to see the pair move higher for a test of 110.50 before heading
lower once again. The Japanese Yen has had a good run lately and as such, profit
taking is expected. We do not have any economic releases until consumer
confidence Friday. Politically, LDP rebels have formed a new party to combat
Koizumi after the postal reform bill fell through at the general election. Yet
polls continue to show higher approval ratings for Prime Minister Koizumi, which
means that political stability has not changed all that much with the launch of
the new party.
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Kathy Lien is the Chief Currency Strategist at Forex
Capital Markets. Kathy is responsible for providing research and analysis for
DailyFX, including technical and fundamental
research reports, market commentaries and trading strategies. A seasoned FX
analyst and trader, prior to joining FXCM, Kathy
was an Associate at JPMorgan Chase where she worked in Cross Markets and Foreign
Exchange Trading. Kathy has vast experience within the interbank market using
both technical and fundamental analysis to trade FX spot and options. She also
has experience trading a number of products outside of FX, including interest
rate derivatives, bonds, equities, and futures. She has a Bachelors degree in
Finance from New York University. Kathy has written for Stocks and Commodities,
CBS Market Watch, ActiveTrader, Futures and SFO Magazine. She is frequently
quoted on Bloomberg and Reuters and has taught seminars across the country. She
has also hosted trader chats on EliteTrader, eSignal, and FXStreet, sharing her
expertise in both technical and fundamental analysis.