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US Double Dips Into Deflation

Latest Inflation Data Proves Major Headache for Federal Reserve’s Policy

deflation

With the Federal Reserve waiting for inflation expectations to rebound before raising interest rates, the latest print demonstrated that the economy is not yet prepared for a shift in policy. Annualized CPI retreated back into deflationary territory after flattening out at 0.00% in the prior month, putting the Federal Reserve’s ambitious plans in further doubt.

Inflation Retreats to Negative Territory

After annualized CPI rebounded to 0.00% in February following the -0.10% print in January, March saw the number fall back to negative territory, adding to a slew of poor macroeconomic figures dogging the outlook. The general optimism surrounding the prospect of higher interest rates from Federal Reserve voting members might be shelved as raising rates will be highly dependent on the anchoring of inflation and positive trajectory. Without a rebound towards the Federal Reserve’s longer-term 2.00% inflation target, FOMC members might be forced to revise their forecasts lower to reflect the dimming outlook. The CPI figures saw dollar momentum continue to the downside with the biggest move felt in equity benchmarks despite the pickup in the deal-making environment. The Dow Jones Industrial Average slumped, falling -1.54% followed by the -1.52% loss in the Nasdaq Composite.

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Chinese Equities Exuberance Crashes

Friday’s crash in Chinese stock prices highlights the precarious nature of investing in local equities as the blockbuster growth in new brokerage accounts and rush into markets created substantial momentum higher in regional indices. The Shanghai Composite lost over 6% on Friday, only to resume the trend lower overnight after the enthusiasm from a reserve ratio cut wore off. The reserve ratio requirement for banks was cut by 100 basis points, marking the second such cut in 2015 as the Central Bank attempts to unfreeze liquidity conditions by freeing up $200 billion. Coupled with the veritable collapse in Chinese housing prices which fell -6.10% on an annualized basis, the policymakers at the People’s Bank of China will likely begin testing further interest rate cuts and other unconventional monetary policy measures to boost output. The offshore Yuan has fallen against the dollar, but gains are likely to be limited.

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Russia to the Rescue

Bolstered by the strong gains in the MICEX Equity Index and Ruble, Russia might be coming to Greece’s rescue after rumors surfaced of a possible $5 billion pipeline deal to transit gas to Europe by effectively bypassing Ukraine. Although denied by Russia, the gas deal could provide Greece with a desperately needed lifeline to continue paying public servants and pensions. According to ECB President Mario Draghi, the situation in Greece remains “urgent” with both sides struggling to reach an accommodation that would unlock funds for the Government to meet its pending obligations. Greece remains defiant amid demands by creditors for compromise, promising to respect campaign promises to end restrictive austerity measures that have hindered any recovery. Meanwhile Draghi has issued a threat against Euro shorts, claiming that they will be punished after the best rally in the Euro in nearly a year.

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GBPUSD Equidistant Channel Technical Pattern

The UK economy’s strong performance has not been enough to offset concerns about the outlook at Bank of England Governor Mark Carney holds off on shifting policy. This contrasts with forecasts for higher rates in the US as the Federal Reserve prepares markets for more hawkish monetary policy measures. Even though growth is slower, the promises have sent the dollar surging until the recent rebound in the GBPUSD pair. The upward trending equidistant channel has a bullish bias with optimal positions initiated at the lower channel line to be closed at the top of the channel. Upcoming Monetary Policy Committee Meeting Minutes from the UK and durable goods orders from the US could see a shift in dollar momentum and a possible breakout from the channel.

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