The USD and Inflation Announcements


The current arguments for a weaker US Dollar seem to center on the risk of inflation in the US. With the Fed engaging in an unprecedented campaign of quantitative easing and a massive budget deficit this is not an illogical stand to take. For more information about quantitative easing, click here. However, projected inflation and a subsequent weakening of the USD has yet to materialize.inflation





DON'T ANALYZE THE USD IN A VACUUM
Like most things in the trading business, there are several factors we have to account for before adjusting our long term bias on the US dollar. For example - are investors confident enough to slacken demand for cash and cash equivalents like government notes and bonds? Or is the decline in commodity pricing enough to overcome the inflation pressure of cash injections?

CPI AND PPI SHOW INFLATION IS NOT PICKING UP... YET
The last inflation information released showed that CPI was flat and PPI (the producer price index) was down. In fact, of the 26 major items measured by the BLS as part of the PPI report, 19 or 74% of them were down in price. Producer prices reflect the costs of materials and services before the actual product hits the consumer market. In this way it sometimes will lead CPI.

TRADE WITH THE TREND TO AVOID THE TRAPS
Until these metrics change, its seems too early to call an end to a stronger US Dollar. The rally in bond yeilds and USD quoted currency majors in January has all the classic signs of a bull trap. To learn more about bull traps, click here. The sudden rise in yields and decline in the value of the USD after a significant down trend is very fragile and could correct in a big way, which is what we are currently seeing in the market.

NEW INFLATION NUMBERS ARE DUE THIS WEEK
Fortunately we will be getting another round of CPI and PPI numbers in the US this week. If the numbers show more of the same for the month of December, the trend is likely to continue. Conversely, US Dollar bulls had better look out if inflation is starting to pick up.

Symbols related to this post: (NYSE: AUD-USD), (NYSE: $TNX)
 
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Comments Add New
ati  - bull trap   |2009-01-12 17:33:40
thanks for advice, John:) I avoided the trap and made some profit by buying
dollar last week
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."
 

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