By Wayne Cole
SYDNEY (Reuters) – The dollar remained in a state of uncertainty on Tuesday as investors waited to see how U.S. economic data would affect the prospects for an overly aggressive interest rate cut, while a rise in Japanese shares helped stem the bleeding in yen carry trades.
The dollar rose 0.33% to 147.72 yen, after briefly touching a one-week high of 148.23 yen overnight before profit-taking emerged.
Japan’s parliament plans to hold a special session on Aug. 23 to discuss the central bank’s decision last month to raise interest rates, government sources told Reuters.
The euro was steady at $1.0938, after rising overnight and approaching resistance at $1.0944 and $1.0963.
The British pound last recorded its price against the US dollar at $1.2778, while it settled at $103.13.
Producer price figures due later will provide an appetizer for Wednesday’s headline inflation report, and could move markets as they feed into the Federal Reserve’s preferred core personal consumption gauge.
Both the headline PPI and the core measure are expected to rise by 0.2%.
More important will be the July consumer price and retail sales report, which could have a significant impact on whether the Fed will cut interest rates by 25 basis points or 50 basis points in September.
Futures are currently evenly split on the bigger move, after briefly pricing it in as a near certainty last week when stock markets were in free fall.
“Higher CPI and hot sales would be the most volatile scenario, and would see the bond market quickly re-pricing to a 25bp cut,” JPMorgan analysts wrote in a note.
“The falling CPI and falling sales may ease some concerns about the risk of stagflation, but they could bring renewed recession fears to the market. We could see the bond market react quickly to this printing pricing in a 50bp or more rate cut in September,” they added.
The first outcome is likely to push up Treasury yields and support the dollar, while the second could have the opposite effect. Talk of a recession, in particular, has tended to boost the yen and the Swiss franc as safe havens.
The futures market clearly still sees recession as a risk, with 101 basis points of Fed rate easing priced in by Christmas, and more than 120 basis points for next year.
This seems to contradict much of the economic data, which suggests the Atlanta Fed’s influential estimate for annual growth is 2.9%.
“The annual consumer price inflation rate in July is expected to be 3.0% y/y and core inflation is forecast to be 3.2% y/y,” analysts at ANZ noted. “While the trend is slowing, inflation is too high to justify the Fed pricing in a 100bp rate cut between September and the end of the year.”
“A physical degradation of the data or an extensive shrinkage process would be required to achieve this.”
In other currencies, the dollar rose 0.17% to $0.6597, while the New Zealand dollar rose 0.3% to $0.6036.
Wages in Australia rose at their slowest pace in a year in the June quarter, data showed on Tuesday, missing expectations, while weaker gains in the private sector suggested the labour market was heading for an improvement.
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