USDollar Graphic Rewind: Market Ignores CPI Data to Focus on Q2 Earnings

2 hr GMT MarketScope Chart, Created by Adrian Robles

The FXCM US Dollar Index (Ticker: USDollar) dropped 55 points this week, as stocks rallied on positive Q2 earnings data. The USD repetitively made new lows for the week on momentum ignited during the first hour of each U.S. trading session. The trend reversed on Friday when U.S. Equities gaped lower generating a pop in the US Dollar Index.

In addition to the Q2 earning theme seen this week, there was a more subtle theme of growing fears of deflation among western countries. New Zealand’s Q2 (YoY) CPI fell to 1.0%, which may require the Reserves Bank of New Zealand (RBNZ) to lower the overnight cash rate or engage in open market operations to increase the inflationary pressure in the economy. The US Dollar reacted little to the New Zealand CPI release, possibly due to market participants focuses on earning or uncertainty on how it would affect the value of the Dollar. Even more interesting Fed Chairmen Ben Bernanke lightened his hawkish tone when discussing inflation rates and the possibility future open market operations. Counter intuitively the USD rose during Bernanke’s testimony before the senate. The US Dollar once again rose when Canada announced an inflation rate of 1.5%, up from May’s figure of 1.2%, indicating to the market that the inflation trend may begin to moderate towards the 2% target.

This week the FXCM US Dollar Index continued to trade in opposition to the US equities market. Through this newer theme of declining inflation rates may begin to surface in price action if countries continue to report lower CPI levels. The levels may also encourage central banks to cut rates and use open market operation for the pure purpose of maintaining price stability. Next week the RBNZ will make its rate decision, and (at time of writing) there is only 5 % implied probability of a 25 bp rate cut. Thus it is important to keep in mind that there is still uncertainty of whether these lower inflation rates will become a significant economic concern.