â€˘ Euro: Record Oil Prices Will Keep the ECB Hawkish
â€˘ Double Dose of Bad News Sends British Pound to a New Record Low
** Kathy Lien will be a Featured Guest on Fox Businessâ€™ Opening Bell this Week; Tune in 9am to 10am ET!
Proof of Why the US Government Wants a Weaker Dollar
The US dollar has recovered on the heels of stronger economic data. The Empire State
manufacturing survey jumped almost 23 points in March while foreign
purchases of US securities increased more than expected in February. Although
some economists argue that one month of stronger manufacturing data
does not equal a recovery, the market is nonetheless pleased to see the
weaker US dollar finally lead to some positives for the US economy. In addition to the Empire State
manufacturing survey, the strong earnings from Johnson and Johnson is
one of dayâ€™s biggest stories. Interestingly enough even though sales
have increased in all 3 of its units, if not for the weakness of the US
dollar, drug sales would have actually declined. Revenues increased 7.7
percent in the first quarter with currency moves contributing a
whopping 5.1 percent to growth. With earning season upon us, the
dollarâ€™s weakness could help to boost revenue for many multinational
corporations. The companies that will benefit the most are the ones
that are heavily reliant on international sales because exports will be
boosted by the weakness of the greenback. Johnson and Johnson is not
the only company to have benefitted from exchange rate fluctuations.
Last month, Nike Inc said that strong overseas sales and beneficial
currency rates pushed its profits up 30 percent. Earlier this year, IBM
reported an 8 percent increase in sales in 2007 but acknowledged that
the increase would have been only 4 percent if exchange rates were
excluded. Meanwhile producer prices grew 1.1 percent last month. With oil and food prices skyrocketing, strong inflationary pressures are not much of a surprise. Although
the growth in core prices was more tepid, with companies like Kimberly
Clark raising the price of Huggies Diapers and Cottonelle products, it
will only be a matter of time before core prices rise as well. Consumer prices are due for release tomorrow along with housing starts and industrial production; we expect these reports to be dollar positive.
Euro: Record Oil Prices Will Keep the ECB Hawkish
For the first time in 3 months, analysts grew more pessimistic on the outlook for the Eurozone economy. We
warned yesterday that even though the consensus forecast pointed to an
improvement in analyst sentiment, this is a group that is notoriously
pessimistic and cringes at any sign of a deterioration in the Eurozone
economy. In recent weeks, we have had mixed economic data which makes it no surprise that analyst sentiment has turned. However,
the correlation between the ZEW and the more important German IFO
report on business confidence is mediocre and for that reason, we only
put limited weight on the data. Instead, we are paying more attention to ECB comments as well as the ramifications of record oil prices. ECB members Trichet and Stark reminded us today that anchoring inflation expectations is of the essence. With oil prices hitting an intraday high of $113.99 a barrel, inflation has become an even greater problem for the ECB. As a result, donâ€™t expect Trichet to loosen his belt anytime soon. Tomorrowâ€™s Eurozone CPI could keep the EUR/USD near its all time high.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
Double Dose of Bad News Sends British Pound to a New Record Low
producer prices drove the British pound higher yesterday, but the lack
of meaningful follow through into consumer prices and continual drop in
house prices drove the pound to a one month low against the US dollar and to a new record low against the Euro. The
CPI numbers today indicate that producers are finding it difficult to
pass on higher costs to consumers which mean that they are taking a hit
to profits. This trend cannot last forever before corporate profitability starts to seriously suffer or producers begin to raise prices. The UK economy is still in trouble, especially after house prices as measured by the Royal Institute of Chartered Surveyors (RICS) fell by the fastest pace in 30 years. At this rate, it is very likely that the UK could be following in the USâ€™ footsteps. In the meantime, employment numbers could help the GBP tomorrow. The
improvement in the employment components of the manufacturing and
service sector PMI reports suggest that there may have actually been
job growth last month.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Higher Commodity Prices Failed to Lift the Canadian, Australian and New Zealand Dollars
Both commodity prices and the stock market have closed today, but that has failed to translate into strength for the Canadian, Australian and New Zealand dollars. This may be partially due to weaker New Zealand consumer prices and moderately dovish minutes from the latest Reserve Bank of Australia monetary policy meeting. Although
prices are rising globally, it appears the strength of the NZD in the
first quarter has appeared to offset much of that rise. The RBA
believes that moderating demand should help to lower inflationary
pressures which mean that they have no plans to alter interest rates in
response to the latest inflationary pressures. The relationship between oil prices and the Canadian dollar has been weak as of late and for that reason, the CAD actually weakened despite record oil prices.
Tell us what you think on the Canadian dollar Forum.
Japan Encourages Foreign Investment
The Japanese Yen crosses are mixed today which is hardly a surprise with little Japanese economic data on the calendar and risk appetite generally unchanged. The Nikkei Net reported that Japan has scrapped taxes on investment returns for all foreign fund or corporations seeking to invest in Japan. Countries like the US
or Eurozone have been exempt from the up to 40 percent tax, but this
new rule will make it more attractive for investors in oil rich
countries like the Middle East to look at Japan as an investment destination.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]