Consumer Price Inflation Slips Modestly as Weaker Energy Prices Weigh on Outlook
Overnight data from Japan confirmed that policymakers might have to explore new options for stoking inflation after national CPI data printed below expectations. The latest annualized core inflation reading came in at 2.00% versus estimates of 2.10% after printing at 2.20% in the prior period. Energy prices continued to weigh on the measure as Japan desperately tries to avert another period of deflation. Bank of Japan policies are already causing problems in the bond market as liquidity dries up and volatility surges. New strategies will likely be explored to expand monetary easing further to support the economy. Broad weakness in the Yen saw the USDJPY continue to climb after a dollar reversal took hold.
Meanwhile, the breakout conflict in the Gulf continues to deployment of expanded forces as Saudi Arabia prepares 150,000 troops for a ground incursion into Yemen. Saudi Arabia was able to regain control of Yemen’s key ports and institute a naval blockade with the combined aid of Egyptian forces and other Gulf members ahead of efforts by regional foe Iran to control these crucial installations. As the fourth most important chokepoint for seaborne oil transit, it was a matter of vital importance to secure these facilities to protect the oil export industry. Oil prices have since retreated from the spectacular gains witnessed after the announcement of the bombing campaign, but nevertheless remain elevated because of the risks of growing conflict in the region.
Strong US employment data was able to reverse nearly a week of losses in the US dollar as initial jobless claims managed to beat expectations to the downside with claims printing at 282,000. More importantly, the 4-week average of initial claims is back below 300,000 for the first time since February in a sign of improving labor market fundamentals. This set off a turnaround in the dollar which has been notably weaker against peers following the FOMC Statement and Yellen press conference. Today’s GDP release could provide further momentum in the dollar if the print manages to meet or exceed expectations of 2.40% expansion. Any disappointment will likely see USD weakness resume. In the meantime, momentum has seen gold prices slide below $1200 per troy ounce.
USDCAD Horizontal Range Trading Opportunity
The horizontal range setup in USDCAD has kept prices bound within a 400 pip range for approximately two months as the outlooks for both the US and Canada face impediments. Weaker oil prices have impacted economic forecasts for Canada as the Bank of Canada is faced with the decision of loosening monetary policy further to support growth in the nation. Today’s GDP figure from the United States will also likely confirm that policymakers will have to confront a setback of lower growth as they try to establish a timeline for raising interest rates. In the near-term, the prevailing strategy is to trade the range, with any change in fundamental data the possible cause for a breakout in the USDCAD pair.