US Dollar Ends on Mixed Note as CPI Contracts for First Time Since 1955

The US dollar remains mixed across the majors as the currency has broken lower against the Canadian dollar, but has generally held to well-defined ranges versus the euro and New Zealand dollar. When it comes to the US dollar index, it is clear that price remains in an uptrend, unless we see a drop below 84.00. The forex markets didn’t show much of a response to this morning’s release of the US consumer price index (CPI), despite the fact that the headline reading contracted for the first time since 1955 on an annualized basis. Indeed, CPI fell 0.1 percent in March, dragging the annualized rate down to -0.4 percent, as energy prices fell by 3 percent. However, excluding food and energy, core CPI actually rose 0.2 percent and the annualized rate held steady at 1.8 percent. All told, this should be somewhat comforting to the Federal Reserve, as the minutes from the Federal Open Market Committee’s (FOMC) last meeting showed that “a few” members were concerned about deflation risks. Ultimately, we will need to see the core CPI results reflect similar declines to the headline readings before it can be said that the US is in the midst of deflation. That said, there is still the risk looming that it a protracted period of contracting prices will occur in late 2009 or 2010. The truth of the matter is that demand, especially for discretionary goods, is likely to fall much further as the unemployment rate climbs. In fact, the unemployment rate hit a more than 25-year high of 8.5 percent in March, and with initial and continuing jobless claims showing no signs of abating, the rate could ultimately breach the upper range of the FOMC’s projections of 9.2 percent, and perhaps reach double-digits.Looking ahead to Thursday, US housing starts and building permits are projected to reflect a steep drop in demand during March, which would mark a major reversal after starts surged 22.2 percent and permits rose 3.0 percent in February. Meanwhile, initial jobless claims are forecasted to have risen to 660k during the week ending April 11, while continuing jobless claim may have hit another record high of 5893k during the week ending April 4. Finally, the Philadelphia Fed’s survey of manufacturing sector conditions is anticipated to have risen to -32 in April from -35, which would still mark a contraction in activity, albeit a less aggressive one.Euro Loses Nearly 1% Against British Pound on Divergent ECB, BOE Rate ExpectationsThe euro generally ended the day lower on Wednesday, as the currency lost ground to majors like the US dollar, Australian dollar, British pound, and Canadian dollar. Meanwhile, the British pound was the second-strongest of the day, losing out only to the Canadian dollar. Once again, there really wasn’t much in the way of fundamental news to drive price action for either the euro or British pound, but there were a few high-profile comments that have the potential to shape interest rate expectations for the European Central Bank (ECB). ECB Governing Council member Axel Weber said the bank needs to establish a floor for the benchmark lending rate, and has also indicated that he would prefer to not cut rates below 1 percent. Meanwhile, ECB Governing Council member Miguel Angel Fernandez Ordonez said that they could cut rates further, and that “it should not be forgotten that there are ways to use non-conventional measures” which they “are going to discuss this at the next board meeting.” All told, these clues that the ECB will move to make monetary policy more accommodative in May adds to downside risks for the euro, especially against the British pound since the Bank of England has suggested they will leave rates at 0.50 percent going forward.Looking ahead to Thursday’s European event risk, 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 ECB’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 sharply. 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.Canadian Dollar the Strongest of the Majors, New Zealand Dollar Faces CPI on ThursdayThe Canadian dollar beat out all of the majors on Wednesday, as the currency rallied 1.3 percent against the New Zealand dollar, Swiss franc, and Japanese yen. The currency also gained almost 1 percent versus the greenback as USD/CAD extended its bearish break from a multi-month triangle formation. The Australian dollar also held up fairly well, but the New Zealand dollar was hit hard and fell against every major currency, with the exception of the low-yielding Japanese yen and Swiss franc.Pairs like NZD/USD could come under further pressure during the next 24 hours as New Zealand's consumer price index is forecasted to have risen 0.3 percent during Q1, which would bring 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.Related Articles: New Zealand Dollar/US Dollar Monthly Forecast, US Dollar/Canadian Dollar Monthly ForecastJapanese Yen Slips as DJIA Recovers 1.38%Forex carry trades managed to recoup some of their losses on Wednesday, leaving the Japanese yen as the weakest of the majors. In fact, the low-yielding yen tumbled 1.40 percent versus the Canadian dollar and just over 1 percent against the British pound and Australian dollar. There are signs that the currency could appreciate in the near-term, though, as the latest FXCM SSI figures – a contrarian indicator - show that traders are net long USD/JPY. However, these moves will be contingent upon risk appetite remaining low, as a resurgence in Asian and European equities overnight could easily send carry trades higher once again.