US Dollar Jumps Ahead of CPI

The US dollar weathered the storm of tariff threats and then crushed the doubters on Wednesday. The US dollar was the top performer while the Australian dollar lagged. US CPI is due on Thursday. The Premium USDJPY short was stopped out.

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The US dollar climbed around a full cent across the board on Wednesday in a move that seemingly materialized from nowhere but a closer look points to a few culprits. The first was central bank talk. Comments from the Fed's Evans – a noted dove – shifted to a more-hawkish stance. He said he was comfortable with 1-2 more hikes this year.

Economic data was also dollar-positive. Wholesale sales jumped 2.5% in May compared to 0.5% expected and PPI rose 0.3% m/m versus the 0.2% consensus. Those aren't tier-one indicators but they're part of a recent trend towards economic data.

Perhaps the nudge for the dollar wasn't good news but bad news. The latest China tariff talk is undoubtedly negative but after a brief dip, the US dollar withstood the storm. The first signs of strength were against USD/JPY where the dollar has been flirting with a breakout. As it cracked 111.40, that set of a flurry of buying that continued to 112.00.

The other broad theme was commodity weakness, especially in oil. Crude was down 5% with WTI erasing nearly half of the gains since mid-June. Here as well, the news didn't fit the narrative. There was a massive 12.6 million barrel draw in US crude but oil barely climbed and that was a signal for the bulls to head to the exits.

In central banking news, the Bank of Canada hiked rates as expected. As we warned, no dovish hike materialized and the kneejerk was higher in the Canadian dollar but hours later the loonie was swamped by the drop in crude.

Looking ahead, the US dollar will stay in focus with CPI due Thursday. The consensus is for a 0.2% m/m rise and 2.9% y/y. If the later number hits 3.0% it could cause some headline shock and another round of USD buying.