Hong Kong and South Korea Pave The Way For Chinese Revaluation,Dollar Slides On Benign Core...

... Consumer Price Inflation,UK Economic Data Continues To Deteriorate

US Dollar

Today's much-anticipated consumer price inflation data let us in on one key thing *
which is that producers have had some success passing over the higher energy prices
to consumers, but that was it. Consumer prices excluding food and energy remained
flat since March, which compares to the 0.2% growth in core producer prices for the
same period. This is the first time since November 2003 that inflation failed to
increase. The annualized pace of core inflation growth also dipped lower for the
second consecutive month. Given that core consumer prices is one of the Federal
Reserve's favorite barometers for inflation, the latest releases adds to the mix of
contradictory economic data that we have seen over the past few weeks. How much
longer the Federal Reserve will raise rates still remains a big question in the
markets and this answer alone will hold the fate for the US dollar in the months to
come. The benign core inflation data takes a 50bp rate hike completely off the
table. Even though we never believed that a half point was a possibility, some
extreme optimists circulated the rumor following the most recent strong non-farm
payrolls report. With inflation tamed for the time being and the Philly Fed survey
being the only notable US economic release left on the calendar, the US dollar's
extensive rally should continue to show signs of exhaustion.

Euro

Like yesterday, today has been a very quiet day in terms of Eurozone economic data.
Tomorrow should bring some minor excitement with the German producer prices, French
current account balance, Eurozone consumer prices and industrial production slated
for release. Inflation in the region as a whole is excepted to subside, with
consumer prices falling from 0.7% to 0.4%. Meanwhile industrial production is
expected to contract for the second consecutive month. The decline was largely
fostered by substantial falls in production in some of Europe's largest economies.
Germany, Italy and France saw decreases of 0.8 percent, 0.6 percent and 0.5 percent
respectively. The detrimental effects of high crude oil prices have largely caused
the fall in production. With heating, transportation and energy costs at high levels
in March, the prices of inputs have accelerated dramatically, hurting industry and
manufacturing. This has also translated into a deteriorating employment atmosphere,
with the Euro-Zone unemployment rate hitting a seven-month high. The rising
unemployment and eroding sentiment about the future of the economy has made it
difficult for businesses to pass increasing costs of production to consumers,
further hindering production.

British Pound

After eight solid sessions of consecutive losses in the British pound, the currency
finally experiences a day of positive gains. Yet it is too early to get
enthusiastic especially since today's economic all suggested further deterioration
in the UK economy. First taking a look at the labor market, the number of
unemployed people rose by 8,100, which is three times more than the market had
anticipated. Wage growth also slowed from 4.7% to 4.6% versus expectations for
acceleration to 4.8%. The real disappointment though came in from the Bank of
England's minutes for the May 6 and 9 monetary policy meeting. According to the
report, the vote was 8 to 1 for leaving rates unchanged compared to 7 to 2 back in
March. BoE Deputy Governor large was left as the only member of the monetary policy
committee favoring a rate hike. The central bank remained concerned about weak
consumer spending and the still-lingering risks of a possible up-tick in inflation.


Japanese Yen

The dollar gave back yesterday's gains against the Japanese yen following the Hong
Kong Monetary Authority's announcement of their plans to widen the USDHKD trading
band to HK$7.75 * HK$7.85 from the 20 year old fixed peg of $7.80. This would allow
for a half of a percent of appreciation in the Hong Kong dollar, which they said was
done to bring HK interest rates more in line with US interest rates. The problem in
HK is that speculative money has flooded into the country as a measure of betting on
Chinese revaluation. As a result, the cash balance of the local banking system has
surged, forcing HK interest rates lower in face of higher US interest rates. The
appreciation is nominal but symbolically important. It has also fueled massive
speculation that this may be a preliminary step to China's revaluation. The Hong
Kong government of course has denied that this is in anyway tied to China's
intentions. Meanwhile, South Korea also announced that they do not plan on
accumulating any more foreign reserves and will not intervene any further in the
foreign exchange markets because they believe that they have "sufficient reserves to
secure" their "sovereign credibility." It appears that the Asian nations are paving
the way for China's revaluation, allowing them to be perceived as the last to
revalue because revaluation is becoming a trend for the region rather than appearing
as if they are succumbing to international pressure.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com


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