Carry Trades Hold Steady, Japanese Yen Mixed (page 1 of 2)

DailyFX Fundamentals 06-11-07

By Kathy Lien, Chief Strategist of DailyFX.com

Dollar: Will US Retail Sales and Inflation Reports Really Matter for the Fed?

The US dollar is stronger across the board but intervention in the New Zealand dollar was by far the biggest event of the day. There was actually no data on the US calendar and only a few speeches by Fed officials. Both Pianalto and Moskow remained hawkish, which is not much of a surprise. Trading in the US dollar should remain relatively quiet until Wednesday when things will seriously heat up. We have the release of the Beige Book report, May retail sales, import and export prices along with the Treasury's foreign exchange report. Although certain members of Congress have not been happy with the value of the Chinese Yuan and the Japanese Yen, the recent policy changes by China will probably save them from being branded currency manipulators. On Wednesday, traders will need to shift their focus to consumer spending and inflation. Last month, we saw record gasoline prices have a limited impact on consumer and producer prices. The rise in gasoline did not occur until late April and early May which means that this week's data could show stronger inflationary pressures. Unfortunately retail sales and the inflation reports could be less market moving than they have been in the past because weaker or stronger numbers will do little to sway the Federal Reserve one way or the other. With the stock market heading back towards its record highs, the Federal Reserve will be reluctant to shift their bias to neutral if the numbers are soft. If they are strong, they also do not have much in the way of flexibility to raise interest rates. Therefore their on-hold policy will continue regardless of whether the numbers or strong or soft. The only thing that could stoke volatility continues to be the stock market. Equity traders are on pins and needles as they wait to see whether the moves in the Dow Jones Industrial Average today and Friday represent a rebound before further losses or an end to the shallow stock market correction.

Impact of RBNZ Intervention Could Be Limited, AUD Continues to Rally

History has been made with the Reserve Bank of New Zealand intervening for the first time ever to weaken their currency. After raising interest rates to 8 percent last week, intervention was the last thing that analysts and traders were expecting. Clearly, the RBNZ's intervention and interest rate hike lead to completely inconsistent results. Unfortunately the Kiwi has become a one way bet and given the need to continue to raise interest rates, the RBNZ felt that if they did not inject some sort of uncertainty into the direction of the currency, it would have most certainly hit 80 cents by the end of the year. The timing was perfect with the Australian markets closed for the Queen's Birthday. However the effectiveness of this intervention will probably be limited because the "goal" or outcome of intervention is generally to increase the money supply, which effectively reduces interest rates. However the RBNZ clearly does not want interest rates to fall, in fact, they are expected to continue to raise rates going forward. Therefore it extremely likely that they will sterilize this intervention in order to neutralize the impact on the money supply. Sterilized intervention requires offsetting intervention with buying or selling of government bonds. By doing so, the intervention is less effective than unsterilized intervention and choosing this option suggests that the central bank is simply trying to send a message to the market rather than reverse the impact of its interest rate hike.