US Dollar, Euro, Commodity Dollars May Respond to Signs of Deflation Risks

FX trading over the course of this week will likely continue to depend more on risk trends rather than fundamental reports, but there are a handful of indicators that could shake up currencies like the US dollar, euro, New Zealand dollar, and Canadian dollar. The majority of them will have to do with inflation, or rather the lack of, and the news could stoke deflation concerns for the world's biggest economies.

US Advance Retail Sales (MAR) – April 14
The Commerce Department is forecasted to report that US retail sales rose 0.4 percent in March, after slipping 0.1 percent in February, and excluding autos retail sales are anticipated to edge 0.1 percent higher. However, there may be downside risks for this reading as the latest ICSC chain store sales numbers show that the contraction in consumption accelerated during March. Indeed, deteriorating labor markets, tight credit conditions, and a year-long recession weighs heavy on the minds of consumers, but as we’ve seen with reports like US non-farm payrolls, the impact of a disappointing result may be mixed as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further. As a result, traders should keep risk trends in mind, as flight-to-quality tends to benefit the US dollar, even if the US fundamental picture worsens.

US Consumer Price Index (MAR) – April 15
At 8:30 ET, the release of the March reading of the US consumer price index (CPI) is likely to highlight the ultra-slow pace of price growth in the US economy. Indeed, CPI is anticipated to have risen 0.1 percent during the month, bringing the annualized pace to completely stagnate. Meanwhile, the core measure – which excludes volatile food and energy costs – is anticipated to rise 0.1 percent and lead the annualized rate down to 1.7 percent from 1.8 percent. Overall, the news is likely to add to concerns that the US is on a one-way track to deflation, a concern that has been cited by “a few” Federal Open Market Committee (FOMC) members, according to the latest FOMC meeting minutes. However, the markets may only respond to the news of the annualized rate falls negative for the first time since 1955.

Euro-zone Consumer Price Index (MAR F) – April 16
Eurostat inflation estimates for the Euro-zone have shown that CPI may have fallen to a 0.6 percent annual pace during March, which would mark the lowest since recordkeeping began in 1991. More importantly, though, the data would highlight that inflation remains well below the European Central Bank’s 2.0 percent inflation target. If Eurostat confirms this at 5:00 ET, or revises the results to the downside, the euro could pull back, especially since the markets are pricing in a small chance of a 25 basis point cut by the ECB on May 7. On the other hand, if CPI is higher than anticipated, the currency could gain as the markets will speculate that the central bank may pause in their efforts to make monetary policy more accommodative.

New Zealand Consumer Prices (1Q) – April 16
New Zealand's consumer price index is forecasted to have risen 0.3 percent during Q1, bringing the annual rate down to a more than one year low of 3.0 percent from 3.5 percent. During Q4 2008, prices contracted for the first time in two years and by the most in ten years, so unless we see another surprise contraction during Q1, the news may not add to speculation that the Reserve Bank of New Zealand will cut rates again during their next meeting on April 29. As it stands, a Bloomberg News poll of economists is reflecting expectations for a 50 basis point cut to 2.50 percent, while Credit Suisse overnight index swaps are forecasting a 25 basis point reduction to 2.75 percent. As a result, this upcoming inflation report could be highly market-moving for the New Zealand dollar, but if inflation pressures prove to be stronger than anticipated, the currency could rally.

Canadian Consumer Price Index (MAR) – April 17
According to the Bank of Canada’s last Monetary Policy Report in January, the Bank expects core inflation to fall throughout 2009 to a low of 1.1 percent, while headline inflation is expected to fall below zero for two quarters in 2009. Upcoming data will provide an update on how these trends fared during Q1, as the consumer price index (CPI) readings for the month of March will be released. Headline CPI is anticipated to have risen 0.3 percent during March, but the annualized measure should remain well above zero at 1.4 percent. Meanwhile, core CPI is projected to have increased by 0.2 percent, leaving the annualized rate at 1.9 percent. All told, these numbers will reflect fairly stable price growth, albeit below the BOC’s 2 percent target, but if the figures reflect a contraction in prices, the Canadian dollar could pull back across the majors. On the other hand, resilient price growth could contribute to Canadian dollar gains, as the moves would suggest that the Canadian economy is holding up better in the current environment relative to other major economies, like the US.