Dollar Takes Backseat To NZD, GBP And EUR

Compared to many other G10 nations, the U.S. producer price report is one of the least interesting pieces of data on today's calendar. Inflationary pressures in the U.S. have been muted for the past year and today's flat PPI number confirms that prices remain steady. After rising 0.8% in June, economists anticipated another 0.3% increase but PPI was unchanged as the declines in auto and raw material prices restrain price growth. Excluding food and energy prices, producer prices grew only 0.1%. This data as well as tomorrow's CPI report should show that inflation poses no major threat to the U.S. economy at this time but the fear that inflationary pressures could accelerate in the future is part of the motivation for tapering asset purchases this year. St. Louis Fed President and FOMC Voter James Bullard may touch on this topic this afternoon when he speaks about the challenges of monetary policy. When we last heard from him in on August 2, he said the economy is improving modestly but he urged the central bank to wait for more evidence of recovery in the labor market and economy before tapering asset purchases, a more conservative view than some of his peers.

NZD Is The Top Dog
Meanwhile, the best performing currency is the New Zealand dollar, which is up approximately 0.9% against the greenback. New Zealand retail sales surged 1.7% in the second quarter. Sales volumes rose in 12 out of 15 retail categories with volume excluding fuel and vehicles rising at its strongest pace since the fourth quarter of 2006. Yet the sell-off in AUD/NZD has been limited (so far) by an equally surprising rise in Australian consumer confidence. The Westpac index rose 3.5% to the highest level since March. It has been a long time since we have seen upside surprises in Australian data and that may be part of the reason why investors are eyeing the improvement with caution.

In Europe, the Bank of England minutes and U.K. employment numbers failed to trigger the big move in sterling that we had been hoping for. Nonetheless, the steep drop in jobless claims boosted the currency and spurred speculation that the central bank's unemployment target will be reached before 2016. According to the MPC minutes, the decision to leave interest rates and the Quantitative Easing program unchanged was unanimous. However on the unemployment rate threshold, one member (Martin Weale) voted against forward guidance to "register his preference for a time horizon for the first inflation knockout that was shorter than proposed," on the fear that it would undermine the central bank's inflation fighting mandate. This slightly hawkish bias combined with stronger employment numbers drove sterling higher and now it will be up to Thursday's retail sales report to take GBP/USD up to 1.56. The euro unfortunately received no support from stronger euro zone GDP numbers. While the region has technically risen out of recession, growth remains modest at best and the ECB's pessimistic forecasts is hampering demand for the currency.

Kathy Lien, Managing Director of FX Strategy for BK Asset Management.