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Forex: According to a WSJ Poll, Oil has Already Hit the Pocketbooks of Consumers

DailyFX Fundamentals 08-17-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· According to a WSJ Poll, Oil has Already Hit the Pocketbooks of Consumers
· French Trade Deficit Widens to a New Record
· Pound Holds Steady as BoE Vote Closer Than Most May Have Thought


US Dollar

The dollar extended its rally for the fourth consecutive trading day thanks to a stronger producer price report. The latest producer price index highlights the disparity between consumer and producer price growth. Producer prices increased 1.0 percent compared to the market’s expectation for a 0.5 percent rise. Core producer prices, which excludes the more volatile food and energy components also increased by a more than expected 0.4 percent compared to the market’s expectation for 0.1 percent growth. Now that we have received both the producer and consumer prices reports, we can see that in the month of July, there was limited pass over of costs from the producer to the consumer. This means that producers are bearing a good portion of the price increase so either they too will have to hike prices soon or take a hit to profits – neither of which is good for the US economy. Although we are pleased to see that oil prices have retraced another two dollars today, it still hovers above $60 a barrel. Although the high-end Hummer driving consumer has been able to shrug off the higher price of oil as nothing more than a mere annoyance, the average consumer will have a much more difficult time dealing with $3 a gallon oil. There was a Wall Street Journal poll 2 days ago of 4000 plus people that asked “How expensive would gas have to be for you to significantly cut the amount you drive.” According to the poll 31 percent of people who responded said that they have already cut driving activities, 21 percent said that they would cut driving when oil reaches $3-$4 a gallon while another 18 percent said that they wouldn’t cut driving until oil hit $4-$5 a gallon. So with 52 percent of the sample population expected to drive significantly less, we think that it is an educated guess to assume that a similar amount probably also have or plan on cutting spending overall. Therefore unless oil continues to retrace back below $60 a barrel, the future of consumer spending and the US dollar remains bleak.

Euro

The only piece of Eurozone data released today was the French Trade balance. Although the deficit widened much less than the market forecasted to EUR1.194bln from EUR1.149bln (market’s forecast was –EUR1.9bln), this is the highest trade deficit that France has ever seen. Unsurprisingly, high oil prices have increased the value of imports while exports took a sharp dive in the month of June. Exports fell 2.8 percent in June following a 6.8 percent rise back in May. The French government is worried that the country is gradually losing its market share of world trade. Like Italy, France has been suffering from a lack of competitiveness. After an exceptionally light economic calendar in the first half of the week, tomorrow we are expecting German producer prices, Eurozone consumer prices and Eurozone industrial production. We doubt that the Eurozone will be able to escape the higher inflation that we have seen globally. Industrial production is also expected to rise as a quiet confirmation of improving conditions within the region.

British Pound

The minutes from the meeting at which the Bank of England cut rates for the first time in 2 years disclosed that the decision was much tighter than the market may have thought. The Monetary Policy Committee voted 5-4 to lower rates with Governor King himself voting to keep rates on hold. With the strong inflation data that we saw yesterday and a hawkish Quarterly Inflation report, we see even more evidence that the central bank may remain on hold for the remainder of the year. The inflation rate is above the central bank’s 2 percent target, which means that they will naturally be concerned about curbing inflation. Meanwhile the labor market report was also encouraging and confirms that things are not as bad as the market may have thought. Unemployment claims increased 2,800 versus a consensus forecast for an increase of 8,800. Claims were also revised down for the month of June while the ILO measure for the unemployment rate for the month of June fell to 4.7 percent from 4.8 percent.

Japanese Yen

The Japanese Yen continues to give back its gains on an empty economic calendar. There is nothing new to report on the USDJPY front. The broad dollar rally is helping to drive the currency pair higher. We would certainly not be surprised to see the pair move higher for a test of 110.50 before heading lower once again. The Japanese Yen has had a good run lately and as such, profit taking is expected. We do not have any economic releases until consumer confidence Friday. Politically, LDP rebels have formed a new party to combat Koizumi after the postal reform bill fell through at the general election. Yet polls continue to show higher approval ratings for Prime Minister Koizumi, which means that political stability has not changed all that much with the launch of the new party.

 

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