Dollar Clings To Lows As A Second String Of Data Comes Into Play

How Will The Markets React?
In terms of market impact, Thursday’s economic releases were of the weakest sort. Typically, the weekly jobless claims and monthly Import Price Index are overlooked by fundamental traders who defer taking positions based on employment and inflation trends for non-farm payrolls and the consumer price gauge respectively. This was the feeling reflected in both Treasuries and equities, though, oddly enough, not in the US dollar. After the numbers hit the wires, the dollar index slipped below considerable support and proceeded to make a new four-month low. While this may have just been a move triggered by technical traders, it could also say something about an unfavorable underlying current in the financial markets which may further play a hand in price action following tomorrow’s data flow. The action will begin Friday morning in New York with the simultaneous release of the February trade balance and last moth’s producer price index. The factory inflation gauge’s importance is completely grounded in the consumer price index due next week. On the one hand, increased pressure could stoke expectations for a hot CPI and hawkish Fed response. Conversely, the stubborn reaction to today’s import gauge suggests traders are not concerning themselves with upstream inflation as it can often generate false signals. At the same time, the trade balance is notorious for being disregarded. However, with protectionist murmurs rumbling on Capital Hill following the Commerce Department’s decision to levy a tariff on imported glossy paper from China, the trade account may generate greater interest with its rising political undertones. The final say on end of the week volatility will belong to the University of Michigan’s preliminary survey of consumer confidence for April. Since the IMF downgraded its 2007 growth outlook, the need for a strong consumer to support expansion has never been greater.

Bonds – US 10-Year Treasury Note Futures
Treasury yields have consolidated all week following last Thursday’s break lower. At the end of last week, the volatile combination of thin liquidity and a surprise in March non-farm payrolls helped drive the active T-note futures contract half a point lower to touch flimsy support now at 107-11. Since then, no indicator has repeated the action recorded just before the Easter holiday began. Tomorrow’s indicators can’t promise anything more than what has been seen this week, though surprises may spur traders to adjust their interest rate forecasts. From the indicators scheduled for release, the PPI and consumer confidence reports hold the most promise for event risk. The inflation number will guide predictions on the more pertinent CPI while confidence will be an important puzzle piece for growth.




FX – US Dollar Index
The US dollar index has plummeted steadily since early February as news regarding the faltering national housing markets raises the question: will it be a hard landing or a soft one? In fact, the greenback broke below a major two year supporting trendline today on the release of relatively unimportant data, boding particularly ill for the currency. Nevertheless, the index has managed to hold above December’s lows of 82.24, as the sentiment of the Federal Reserve remains on the hawkish side amidst signs that inflation pressures have yet to let up. Will dollar bears take over and take the currency towards new lows? If so, fundamentals may have little do with the moves as price action could remain contingent on more technical factors. Prudent traders should still pay heed to the data at hand, however, as Friday’s release schedule is chock full. At 12:30GMT, the Trade Balance for the month of February and the Producer Price Index for March will hit the tape at the same time. While the trade data tends to garner attention simply on the fact that the figure is continuously weak, traders will likely focus on PPI following the pick up in import prices. While the headline producer price index is estimated to post at a lofty 0.7 percent, the core measure is anticipated to slow to a milder 0.2 percent, signaling that volatile energy costs are likely the culprit of recent pressures. As a result, markets may start to believe that price growth will taper off in coming months, leaving little impetus for the central bank to raise rates. Furthermore, the University of Michigan Confidence survey will be released at 14:00GMT, and if the indicator slips in line with forecasts to 87.5 from 88.4, sentiment amongst the markets could become even more pessimistic as one of the major drivers of US growth - consumption - could be next to take a hit.

Equities – S&P 500 Index
Wall Street managed a rally after falling lower in early trade on the release of a jump in import prices. In fact, the monthly figure surged to 1.7 percent on the back of higher oil prices after rising a tepid 0.1 percent during the month prior. As a result, inflation worries were only exacerbated as the Federal Reserve's monetary policy stance has remained hawkish. Nevertheless, the S&P 500 ended the day 0.62 percent higher at 1,447.80 led by healthcare, pharmaceutical, railroad, energy and industrial stocks. MedImmune rose 15.3 percent to $43.63 after the drug company said it would consider being sold.

US equities will get slammed with an array of releases on Friday. At 12:30GMT, the Trade Balance for the month of February and the Producer Price Index for March will hit the tape at the same time. While the trade data tends to garner attention simply on the fact that the figure is continuously weak, traders will likely focus on PPI following the pick up in import prices. While the headline producer price index is estimated to post at a lofty 0.7 percent, the core measure is anticipated to slow to a milder 0.2 percent, signaling that volatile energy prices are likely the culprit of recent pressures. This may leave markets alarmed that the Federal Reserve will take action on their tightening bias, subsequently sending shares lower and making it difficult for the S&P 500 to break above 1,449.00 towards February’s highs. On the other hand, if traders start to believe the core prices are on the way to tapering off, they may foresee rates holding steady at 5.25 percent or could even consider a rate cut, which would give equities a decent boost. Wrapping up the week, the University of Michigan Confidence survey will be released at 14:00GMT, and if the indicator slips in line with forecasts to 87.5 from 88.4, sentiment amongst the markets could become even more pessimistic as one of the major drivers of US growth - consumption - could be next to take a hit.