Poor economic data out of the US coupled with more jawboning in favor of the US dollar elicited a lackluster day for equities and resurgence in the buck. Stock markets closed up a smidge as a late day rally helped erase sharp losses early in the session. EUR/USD remained extremely well correlated with the risk trade and the pair squeezed down from a NY session open by 1.4880/90 towards the 1.4870 zone at last look. The recovery in stocks helped the pair come off the lows just above the crucial 1.4800 support level.
Economic data was highlighted by inflation numbers. The annual rate of core producer prices in the US sank to just 0.7% in October from 1.8% the prior month. The market was looking for a 1.4% read. At minimum this should quiet the inflation hawks in the short-term and remove some speculation that the Fed will tighten policy before expected. Insofar as rates remain lower for longer, this is a positive for risky assets and commensurately a negative for the US dollar.
Meanwhile, Fed officials remain cautiously optimistic. Following on the heels of a rather dovish Fed Chairman Bernanke, Richmond Fed President Lacker offered a somber assessment of the US economy. On employment, he noted that job creation is ''particularly slow'' but that high unemployment is part of a ''cyclical contraction''. Contraction indeed and with initial jobless claims still running north of 500K, expect this caution about the job market to remain a topic du-jour around the mahogany table. Our analysis shows that we need to get claims below 400K in order to generate a positive NFP print.
Lacker also went into the dismal fiscal situation in the US. He called the problem ''very serious'' and we would concur. The one-sided nature of the near-term dollar short position notwithstanding, we do not see how the greenback can find any long-term footing in an environment of an ever expansionary government. So-called health care reform and its $1 to $2 trillion tab could be the proverbial nail in the coffin.
Gold extended gains once again and added a couple of bucks to sit near the $1142 area at last look. In the short-term, we would anticipate some strong option-related selling interest ahead of the $1150 area but we maintain that the overall trend remains higher while above $1100. The seasonal pattern observed over the past decade or so suggests we could be looking at a $1300 price level by year-end. Not too shabby.
The highlight in Asia looks to be the Australian index of leading economic indicators for September. There is no consensus forecast to speak of, but a significant improvement from the 1.1% August print should help Aussie grind higher here in the short-term. The 100-hour sma in AUD/USD by 0.9310 is formidable resistance here but above should open up potential towards 0.9370 on the follow.