Where's The Love?

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By Mike Conlon | February 14, 2011

Happy Valentine’s Day!Though there was no love for me this morning as I had some computer issues which have prevented me from doing a video this morning. Apologies to my audience.

And today there is also no love for the Euro, which is trading lower across the board as Portugal reported that its economy shrank by .3% last quarter for the first time in almost a year as government spending declined and taxes were raised. Portugal is potentially the next shoe to drop in the European debt crisis as there is still no meaningful resolution in place. Adding to Euro declines was the industrial production figures, which showed a slight decline in December.

Tomorrow is a news-worthy day; as the Euro zone will be reporting GDP figures.

This is also a big weak for the Pound, as tomorrow will bring CPI data which is expected to show rising inflation of 4%, nearly twice the BOE target. This will be followed on Wednesday by the BOE Inflation Report and jobless claims numbers which will show if there is any sign of a slow-down.

Japan will also have its rate policy decision tomorrow after reporting that GDP shrank less than expected. There is no change expected for the rate decision.

So today is kind of light on news, with important data due out later in the week. Markets are flat to slightly higher, electing to pause a bit after the excitement of Egypt last week. Going forward, it will be interesting to see if there is any contagion from the events that spread to other areas in the Middle East, and what that does to risk themes and markets overall.

In the forex market:

Aussie (AUD): The Aussie is higher across the board as gains in home loans rose more than expected. This helped prompt some risk appetite as Asian stocks were higher overnight, also benefiting from better than expected GDP in Japan and higher expected CPI data from China.  Tomorrow is the release of the RBA board meeting minutes.

Kiwi (NZD): Unfortunately for the Kiwi, it is not benefiting from risk appetite but perhaps that is helping to mitigate losses as retail sales figures came in worse than expected, showing a decline of 1.1% vs. an expectation of a decline of .4%.

Loonie (CAD): The Loonie is trading mostly higher as oil is slightly higher to start the day. On Friday, CPI data will be released which will show if there is any inflation that might concern the BOC and cause a potential rate hike in the near future.

Euro (EUR): The Euro is lower across the board after industrial production figures came in slightly lower than expected, showing a decline of .1% vs. an expectation of no change. In addition, Portugal’s reported GDP decline as the market re-focusing on debt as Portuguese bond yields are starting to rise. With no solution in sight to the debt crisis, keep an eye on Portugal as potentially the next domino to fall. (Click chart to enlarge)

Pound (GBP): The Pound is mostly higher ahead of tomorrow’s CPI and home price data and Wednesday’s Inflation Report from the BOE. The Central Bank may be running out of time to do something about monetary policy if inflation continues to rise and any rise in jobless claims will be perceived as negative.

Dollar (USD): The Dollar is trading mostly lower, as recent strength due to Euro weakness and risk aversion from Egypt have abated slightly. There’s no news here in the US today, but Tuesday will show advance retail sales figures followed by CPI data on Thursday. Expect the inflation talk to heat up this week, but with no real fixes in sight.

Yen (JPY): The Yen is also mixed this morning as GDP in Japan contracted less than expected, showing a decline of 1.1% vs. an expectation of a 2% decline. While the Japanese rate policy decision is expected to produce no change tomorrow, a focus is now on Japanese fundamentals could induce further weakness despite any risk events. (Click chart to enlarge)

There will be no love lost this week when some of the inflation data gets reported. Higher prices are being seen around the globe and this was one of the initial catalysts of the uprising in Egypt. It is only a matter of time before outrage reaches “most established� economies as well.

The UK will be first to react, as inflation there is approaching 4% and the BOE has still not made any changes. Here in the US, we will most likely be told again that there is no inflation so the Fed can maintain low interest rates. While the usual supply and demand rhetoric will be used to explain away the problem, I can assure you that low interest rates here in the US are one of the major contributing factors to global inflation.

It is no secret that the US is trying to inflate away its debt, and will attempt to do so on the back of the consumer. So keep an eye on the CPI data, and whether or not there is any public backlash over rising prices.

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