Dollar Stumbles as CPI Data Takes the Wind Out of Rate Expectations, EU Fears Ease Up

• Dollar Stumbles as CPI Data Takes the Wind Out of Rate Expectations, EU Fears Ease Up
• Euro Quick to React on a Successful Spanish Debt Auction, Outlook Still Very Uncertain
• British Pound Stoic in the Face of Further Budget Cuts, Public Borrowing Stats Due Friday
• Swiss Franc Surges after the SNB Hints that it will Curb its Intervention Efforts
• New Zealand Dollar Struggles to Assert Itself as a High-Yield, Speculative Currency

Dollar Stumbles as CPI Data Takes the Wind Out of Rate Expectations, EU Fears Ease Up
It was an efficient transition for dollar bears today. In the early, pre-US trading hours Thursday, the greenback was weighed by a boost in sentiment that undermined the currency’s status as a safe haven. And, just as that speculative boost began to fade, the US docket would take a fundamental approach to extending the dollar’s bearish drive with an assault on growth and interest rate forecasts for the world’s largest economy. Approaching the day chronologically, the early trading hours had investors focusing on the European Union – Spain specifically. After days of rumor and inference that the EU’s fourth largest economy was days away from hashing out a financial assistance program with the European Commission and IMF, the markets had come to a figurative line in the sand. The nation was scheduled to sell 3.5 billion euros in government bonds; and the success or failure of this effort would theoretically reflect investors’ confidence in Spain’s health (though it does not really suggest whether they will ultimately ask for aid). With a lower yield and strong demand, a sigh of relief was breathed and the pent up risk premium of the previous few days would unwind. Yet, there is reason to doubt this single event can truly turn the tides on the global financial market’s health or even carry sentiment far enough to stamp out worry surrounding this one economy. The EU as a whole is still at risk of saddling enormous costs should any one of its members fall on hard times; China is struggling in the background struggling to prevent bad debts from turning into a credit seizure; and the entire world is still confronted by sovereign debt concerns. We are still day-to-day at this point.

The sentiments articulated above must have been shared by more than a few investors; because speculative assets quickly burned through the good will the Spain event maintained and markets either stabilized or reversed. Factoring in to broader sentiment trends – but striking an even more harsh note for the dollar itself – data released in the early trading hours of the US session sent the S&P 500 futures and the dollar down at the same time. Encouraging price action on both fronts was the overview of economic activity for the US economy. Though not one of the top economic indicators for the US docket (not even making the second tier really), the initial jobless claims report for the week ending June 12th stirred interest that has been particularly sensitive to relative growth potential in recent weeks. According to the report, first time filings for unemployment benefits rose to a 472,000 pace last week – the fastest clip in a month. Another notable reading released at the same time was the first quarter current account balance which swelled to a $109 billion on a significant increase in physical trade. Neither of this figures should come as a surprise really; but vested against the relatively robust performance of the May Leading Indicators composite (showing a 14th month whereby growth has been expected to expand or hold), this mix confirms that activity is uneven. This may not be of dramatic concern just yet; but when lending cools, stimulus is withdrawn and rates rise, the economy’s stability will be tested. If this was a trial that occurred today, the US economy would likely fail in dramatic form given the absence of robust consumer spending, business investment and trade.

A fundamental weight that tempted the dollar’s value in a different way was the May consumer inflation data. The headline CPI reading cooled to a 2.0 percent pace as expected (notably in line with the Fed’s medium-term target); but the truly interesting angle on this report was the performance of the core number. The 0.9 percent clip of the more stable reading represents a hold from the previous month; but this nonetheless matches the lowest price pressure since 1961. It is difficult to spin speculation for a Fed rate hike this year given this reading.

Euro Quick to React on a Successful Spanish Debt Auction, Outlook Still Very Uncertain
There was little on the European docket and investors in the time zone weren’t really concerned with anything other than Spain’s debt auction. After days of speculation that the country was trying to work out a 250 billion euro financial aid package with the same authorities that had helped Greece, news that the 3.5 billion euro sale of 10 year notes and 30 year bonds went well was met with relief. Not only would the country successfully raise the necessary funds; but the yield established was lower than the previous auction and demand went well beyond what was expected. Yet, there is still reason for doubt. It is well known that the ECB is buying government bonds to ease tension in the credit markets. If they had supplemented lacking private interest, this event would be far less inspiring. Furthermore, the Spanish government still has 24.7 billion euros in liabilities coming due next month and the countries financial health may still require assistance from deep pockets. Nonetheless, officials would attempt to build momentum on the positive reaction to the auction with Spain’s Finance Minister suggesting the nation would probably use less than a third of a 99 billion euro bank rescue fund developed last year while a few voiced their confidence in a positive response to the release of the stress test results (which will be by company). Yet, it is up to the investor to decide what is encouraging and what isn’t.

British Pound Stoic in the Face of Further Budget Cuts, Public Borrowing Stats Due Friday
There were a few economic releases for the pound to take in Thursday; though the impact these numbers had was modest. The government’s retail sales report would come out better than expected with a 0.5 percent pick up – though this report is remarkably volatile. A the same time, the CBI Industrial Trends figure slipped but from its highest level since August 2008. In the end, the real interest was in the government’s announcement of a little fiscal housekeeping. The Secretary to the Treasurer reported 8.5 billion pounds in planned spending was halted and another 2 billion pounds active projects was cut. Slow progress on a massive shortfall. Traders patiently await the 22nd’s emergency budget.

Franc Surges after the SNB Hints that it will Curb its Intervention Efforts
It comes as no surprise that the SNB held its target Libor rate unchanged with a median of 0.25 percent. What was remarkable was the commentary that followed the announcement. Growth and inflation expectations were lifted; but FX traders honed in on remarks that deflation pressures had “largely disappeared.” This is taking to mean the central bank is abandoning its failed bid to keep the franc from rising.

New Zealand Dollar Struggles to Assert Itself as a High-Yield, Speculative Currency
If we look at interest rate expectations as priced into the market by Credit Suisse overnight index swaps, we see that there is a 82 percent chance of a July rate hike from the RBNZ and 139 bps of cumulative hikes expected over the coming 12 months. Yet, the kiwi struggles to take the lead on risk positive days. Data like Thursday’s drop in June consumer confidence levels tells us why doubts persists.

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