On Thursday, well saw the result of what happens when inflationary and low-growth numbers are released simultaneously. On the inflationary side, we had higher import prices and on the low-growth side, we had retailers reporting lower sales and a widened trade balance (which is a drag on real GDP).
This is a stagflationary situation-lower growth and higher inflation. It makes markets nervous because it puts the Fed in a very difficult policy position.
As a result of this, we saw an unwinding in carry trades as the GBP/JPY and EUR/JPY depreciated. As we have seen, carry trade unwinding also involves the dollar, because the price of GBP/JPY = GBP/USD x USD/JPY (This works the same for EUR/JPY, NZD/JPY etc). So additionally, when the GBP/JPY carry trade unwinds, the dollar will strengthen vs. the GBP and weaken vs. the JPY.
With the retail sales number, traders look at what's called the "ultracore" number. The ultracore number strips out gasoline from the equation, leaving a better picture of true retail sales. It's possible to see the retail sales number up becasue gasoline has gone up, but it's possible to see the ultracore number down because 85% of retailers reported lower sales in April.
If it does turn out that the ultracore retail number prints low while core PPI prints high (a real possibility because of higher energy and industrial commodity prices filtering thru to the core number), we'll have the same situation as Thursday-stagflationary indicators. As we saw on Thursday, stagflationary indicators can lead to risk aversion i.e. carry trade unwinding.
It really gets interseting when you do some arithmetic. If GBP/USD and USD/JPY lose a total of 60 pips between them-that's about 100 pips of depreciatoin in the GBP/JPY. 100 pips between them is 160 for GBP/JPY.
This is a stagflationary situation-lower growth and higher inflation. It makes markets nervous because it puts the Fed in a very difficult policy position.
As a result of this, we saw an unwinding in carry trades as the GBP/JPY and EUR/JPY depreciated. As we have seen, carry trade unwinding also involves the dollar, because the price of GBP/JPY = GBP/USD x USD/JPY (This works the same for EUR/JPY, NZD/JPY etc). So additionally, when the GBP/JPY carry trade unwinds, the dollar will strengthen vs. the GBP and weaken vs. the JPY.
With the retail sales number, traders look at what's called the "ultracore" number. The ultracore number strips out gasoline from the equation, leaving a better picture of true retail sales. It's possible to see the retail sales number up becasue gasoline has gone up, but it's possible to see the ultracore number down because 85% of retailers reported lower sales in April.
If it does turn out that the ultracore retail number prints low while core PPI prints high (a real possibility because of higher energy and industrial commodity prices filtering thru to the core number), we'll have the same situation as Thursday-stagflationary indicators. As we saw on Thursday, stagflationary indicators can lead to risk aversion i.e. carry trade unwinding.
It really gets interseting when you do some arithmetic. If GBP/USD and USD/JPY lose a total of 60 pips between them-that's about 100 pips of depreciatoin in the GBP/JPY. 100 pips between them is 160 for GBP/JPY.